The ABCs of ETFs

The Growth, Challenges and Opportunities

of Exchange-Traded Funds
A Primer for Investment Managers with
a Lexicon of Terms
WHITE
PAPER
TABLE OF CONTENTS
[03]
Whats Behind the Boom?
[06]
In the Beginning. . .
[07]
Not Your Fathers Mutual Funds
[08]
Flavors of ETFs and Their Uses
[09]
Leveraged ETFs: Flirting with Disaster?
[10]
Challenges and Opportunities
[12]
Lexicon: The Etymology of ETFs
Few investment products have been as popularor as misunder-
stoodin modern times as exchange-traded funds (ETFs). Indeed,
given the passions these funds have evoked, ETFs have become Wall
Streets version of the Rorschach test. You can see in them pretty much
anything you want, depending on your point of view.
To legions of loyal investors, exchange-traded funds and exchange-
traded products (ETPs), a very similar variant, are the perfect invest-
menta fixed basket of stocks or other securities that provide the
diversification of mutual funds, but with lower expense ratios, greater
transparency and more tax advantages. But to critics, the newer gener-
ation of ETFs to roll out of Wall Streets laboratories are potential
weapons of mass financial destructioncomplex financial instruments
that are capable of triggering another financial crisis. And to regulators,
who approved the first ETFs in 1989, exchange-traded funds look
like. . . well, amorphous inkblots that require closer scrutiny. But more
on that later.
These criticisms and uncertainties havent dampened investors ardor
for exchange-traded funds, though. Over the past decade, ETFs have
evolved from a low-cost alternative to index funds to a phenomenon
that, at $1.35 trillion,
1
is quickly approaching the $2 trillion held by all
hedge funds.
2
And yet this may be just the first act for ETFs: consult-
ants McKinsey & Company recently predicted that the assets held
globally in ETFs could rise to between $3.1 trillion and $4.7 trillion
by 2015. As McKinsey noted, in the last decade no other significant
segment of the US asset management industry has grown as quickly
and consistently as ETFsnot managed accounts, IRAs or even the
booming defined contribution market. ETFs are clearly here to stay.
3
Whats Behind the Boom?
Whats driving the rush into exchange-traded funds? For one, the lack-
luster performance of the markets over the past decade has prompted
many investors to look for lower-cost alternatives to mutual funds, and
theres no denying the cost advantages of ETFs. The average expense
ratio for ETFs tracking the Standard & Poors 500 stock index is 0.32
percentor nearly half the average 0.6 percent expense ratio for tradi-
tional S&P 500 index funds.
advent.com 03
This communication is provided by
Advent Software, Inc. for informational
purposes only and should not be con-
strued as, and does not constitute,
legal advice on any matter whatsoever
discussed herein.
1 ETP Landscape: Industry Highlights, BlackRock Advisors, January 2011.
2 Hedge Fund Investors Rotate into Macro, Arbitrage Strategies for 2012, Hedge
Fund Research Inc., 19 January 2012.
3 Onur Erzan, Ogden Hammond and Juan Banet, The Second Act Begins for ETFs:
A Disruptive Investment Vehicle Vies for Center Stage in Asset Management, McKin-
sey & Company, August 2011.
In the last decade no other
significant segment of the
US asset management industry
has grown as quickly and consis-
tently as ETFsnot managed
accounts, IRAs or even the boom-
ing defined contribution market.
ETFs are clearly here to stay.
In fixed income, the gap is even greater: The average expense ratio for
ETFs tracking the Barclays Capital US Aggregate Bond index is 0.14
percentjust a third of the 0.42 percent in annual expenses charged
by comparable mutual funds. This difference in costs explains a large
part of the performance gains that exchange-traded funds have
enjoyed in recent years. According to McKinsey, S&P 500-based ETFs
earned an average 1.89 percent return annually between 2007 and
2010, versus the 1.57 percent for comparable mutual funds. And for
exchange-traded funds tracking the Barclays Capital Bond index, the
performance gap was even larger: a 5.51 percent return for ETFs track-
ing the Barclays Capital index versus 4.72 percent for comparable
mutual funds during the same period.
4
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4 Onur Erzan, Ogden Hammond and Juan Banet, The Second Act Begins for ETFs:
A Disruptive Investment Vehicle Vies for Center Stage in Asset Management,
McKinsey & Company, August 2011.
200
400
600
800
1,000
Assets (US$bn) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Oct-11
ETF total 74.3 104.8 141.6 212.0 309.8 412.1 565.6 796.7 711.1 1,036.0 1,311.3 1,386.1
ETF equity 74.3 104.7 137.5 205.9 286.3 389.6 526.5 729.9 596.4 841.6 1,053.8 1,094.4
ETF fixed income 0.1 0.1 4.0 5.8 23.1 21.3 35.8 59.9 104.0 167.0 207.3 251.7
ETF commodity 0.0 0.1 0.3 0.5 1.2 3.4 6.3 10.0 25.6 45.7 35.2
1
Other ETPs total 5.1 3.9 4.1 6.3 9.3 15.9 32.5 54.6 61.2 119.7 171.3 191.4
# ETFs 92 202 280 282 336 461 713 1,170 1,595 1,944 2,460 2,950
# Other ETPs 14 17 17 18 21 63 170 371 625 750 1,083 1,202
0
1,200
1,400
1. ETPs with commodity producers equity exposure have been reclassified this month from the commodities category into global equity.
Note: CAGR = Compound Annual Growth Rate. AUM = Assets Under Management. Global ETP flows are approximated by combining flows available for the United
States, Europe, Canada and Latin America (excludes Asia, Middle East and Africa which are not available). Israel ETP assets and shares outstanding on Chinas ETFs are
as at end of September 2011. All other data as at end of October 2011.
Source: BlackRock Investment Institute, Bloomberg.
Assets US$bn # products
500
1,000
1,500
2,000
2,500
0
3,000
3,500
The 10-year CAGR Ior ETF AUM is 28.7% (using only 10 months Ior 2011). For ETFs, 7% oI AUM is invested in equity products, 18% is invested in
Iixed income products and 2.5% is invested in commodity products. Other ETFs (excluding ETFs) are primarily invested in commodities82.%.
Global ETP multi-year asset growth
Whats more, the proliferation of exchange-traded funds has enabled
investors to gain exposure to not only exotic countries or narrow indus-
try subsectors but also to commodities such as gold, oil, natural gas
and copper that were previously too impractical and expensive to buy
outright. Today, via ETFs an investor can take stakes in everything from
copper to clean energy to the Czech Republic. And since ETFs trade
on the major exchanges, investing is as easy as buying a stock. And it
comes as no surprise that some financial advisors now create client
portfolios entirely composed of ETFs. We can have more precise asset
allocation at very low cost, Justin Urquhart-Stewart of London-based
Seven Investment Management told The Economist.
5
As ETFs have grown, so too have the ways that theyre used. In recent
years, more and more of the demand has come from hedge funds that
view ETFs as a cost-efficient way to move in and out of different mar-
kets rapidlysometimes as part of complex algorithmic trades and
almost always with lots of leverage. To satisfy this demand, some ETF
firms have rolled out a new breed of exchange-traded funds whose
portfolios consist not of a basket of stocksbut simply of derivatives
or swaps positions with an investment bank as the counterparty. By
using derivatives, these so-called leveraged ETFs effectively allow
investors to make bets of two or three times the size of their invest-
ment, without having to borrow on margin.
Perhaps not surprisingly, its the leveraged ETFs that top the perform-
ance charts. Case in point: the Direxion Daily 20 Year Plus Treasury Bull
3x ETF, an exchange-traded note, was up 109.2 percent in 2011
6

more than double the return for the best-performing mutual fund
during the same period.
But the popularity of leveraged and synthetic ETFs has given rise to
critics who argue that some of the recent market downturnsincluding
the flash crash of May 2010were triggered not by high-frequency
traders, as was widely assumed at the time, but by hedge funds dump-
ing leveraged ETFs. Theyve turned the market into a casino on
steroids, Douglas A. Kass, founder and president of Seabreeze Part-
ners Management, told The New York Times. They accentuate the
moves in every directionthe upside and the downside.
7
BlackRock
CEO Larry Fink was more succinct in his assessment of leveraged and
inverse ETFs at a September 2011 conference, declaring that, We
wont play in themwe think theyre toxic.
8
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5 Trillion-dollar Babies: A Fast-Growing Asset Class, The Economist, 21 January 2010.
6 Mark Gongloff, Top-Performing ETFs of 2011: Apocalyptic Bets Paid Off Well,
The Wall Street Journal, 6 January 2012.
7 Andrew Ross Sorkin, Volatility, Thy Name Is E.T.F., The New York Times,
10 October 2011.
8 Jackie Noblett, Leveraged ETF Sales Shrug Off Volatility Fears, The Financial
Times of London, 19 September 2011.
Today, via ETFs an investor
can take stakes in every-
thing from copper to clean
energy to the Czech Republic.
And since ETFs trade on the
major exchanges, investing is as
easy as buying a stock.
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Regulators have taken notice as well. In March 2011, the US securities
regulator, the Securities & Exchange Commission (SEC), imposed a
moratorium on new ETFs that used derivatives while it studied the
issue further.
9
What the SEC will ultimately decide is anyones guess,
though Soo Kobberstad, a senior analyst for Moodys Investor Services,
predicted that the agency will limit the use of derivatives as well as the
amount of leverage that funds can take on.
10
But that may serve only
as a temporary setback for a product that has certainly eclipsed the
expectations of the pioneers who rolled out the first ETFs a little more
than 20 years ago.
In the Beginning. . .
The first exchange-traded funds were created in 1989 in the form of
Index Participation Shares (IPS), which were designed to be a more tax-
efficient clone of the popular S&P 500 index funds. The SEC gave its
blessing for the American Stock Exchange and the Philadelphia Stock
Exchange to trade IPSs, but the Chicago commodities exchanges sued
to halt trading and won, arguing that the products were futures and not
securities. But the success of a similar product in Toronto that repli-
cated major Canadian indices prompted US promoters to try again
with a structure that would pass muster with regulators and the courts.
And in 1993, the American Stock Exchange successfully launched the
Standard & Poors Depositary Receipts by structuring it as a unit invest-
ment trust. Better known as SPDRs, or Spiders, they became such a
hit that the Amex quickly rolled out several variants.
Top 10 ETF Sponsors ($ billions)
Rank Sponsor Assets Market Share 2011 Net Flows
1 BlackRock iShares $599.1 39.3% $ 2.3
2 State Street Global Advisors 270.3 17.7 21.2
3 Vanguard 170.7 11.2 22.2
4 PowerShares/Deutsche Bank 59.4 3.9 4.0
5 Db x-trackers/db ETC 44.1 2.9 ( 6.1)
6 Lyxor Asset Management 34.9 2.3 (18.5)
7 ETF Securities 24.8 1.6 ( 1.4)
8 Van Eck Associates Corp 23.5 1.5 3.5
9 ProShares 23.1 1.5 ( 0.5)
10 Nomura Asset Management 18.4 1.2 1.8
Data: BlackRock Investment Institute, Bloomberg
9 SEC Staff Evaluating the Use of Derivatives by Funds, Securities & Exchange
Commission, Release 2010-45, 25 March 2010.
10 Yali NDiaye, Moodys: SEC Proposal to Likely Limit Funds Derivative Use as
Investment, Market News International, 12 September 2011.
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Sensing a lucrative new revenue opportunity, other firms quickly fol-
lowed suit. In 1996, Barclays Global Investors jumped into the game
when it introduced the World Equity Benchmark Shares, a series of
funds that tracked the 17 different MSCI country indices. In 1997, State
Street Global Advisors launched a series of ETFs that followed the nine
sectors of the S&P 500, and Barclays countered with the iShares line as
well as the first ETFs in Europeand the game was on. Those firms
have reaped the benefits of being the first movers. Today, the three
largest ETF managersState Street, Vanguard and BlackRock (which
acquired Barclays Global Investors in 2009)control roughly two-thirds
of the ETF market, and theyve used that critical mass to drive fees
down below what new entrants can match. To wit: State Streets $90.9
billion SPDR fund, which mimics the S&P 500, has a total expense ratio
of just 0.15 percent.
Coincidence or not, exchange-traded funds have steadily gained in
popularity since their introduction, as returns from other securities have
been harder for investors to come by. In the past decade, ETF assets
have grown an average of nearly 30 percent a year. There are now 193
firms around the world offering 4,211 different types of exchange-
traded products that allow investors to do everything from short the
yen to go long on cocoa. Investors can buy leveraged ETFs that provide
outsized gains (or losses), as well as inverse ETFs that move counter
to an indexand for good measure, even leveraged inverse ETFs!
Not Your Fathers Mutual Funds
At first blush, ETFs might appear to be a variation of the closed-end
mutual fund, which trades throughout the trading day at prices that
may be more or less than its net asset value. Thats true, but exchange-
traded funds have as much in common with stocks as they do with
mutual funds, and heres why: From the time that an ETF sponsor sells
the first units, investors buy and sell exchange-traded funds over a
listed exchange or through one of the participating electronic commu-
nications networks (ECNs) such as Arca. Moreover, investors in ETFs
can execute all of the same moves they do with stocks, including mar-
ket orders, limit orders, stop orders, short sales and margin purchases.
Exchange-traded funds have
steadily gained in popularity
since their introduction, as returns
from other securities have been
harder for investors to come by.
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Top 10 ETFs ($ billions)
Rank Sponsor Ticker Assets
1 SPDR S&P 500 SPY US $95.3
2 SPDR Gold Trust GLD US 63.0
3 Vanguard MSCI Emerging Markets VWO US 41.9
4 iShares MSCI EAFE Index Fund EFA US 36.6
5 iShares MSCI Emerging Markets Index Fund EEM US 32.6
6 iShares S&P 500 Index Fund IVV US 26.2
7 PowerShares QQQ Trust QQQ US 25.6
8 iShares Barclays TIPS Bond Fund TIP US 22.2
9 Vanguard Total Stock Market ETF VTI US 19.5
10 iShares iBoxx $ Investment Grade Corp Bond IWM US 17.2
Data: BlackRock Investment Institute, Bloomberg
To fill the trades made by investors, market makers are constantly mak-
ing exchanges with the investment firm that launched and now spon-
sors the ETFeither swapping a basket of securities that comprise the
ETF or vice versa. These exchanges are known as in-kind transfers
and arent considered a taxable event by the US tax collector, the Inter-
nal Revenue Service. Thats in contrast to mutual funds, whose man-
agers may need to sell securities to raise cash for redemptionsand in
the process, create a possible capital gain on which shareholders
must pay taxes. With ETFs, its the investorand investor alonewho
decides when to sell and take any capital gains. This control makes
ETFs far more attractive to many tax-sensitive investors.
Flavors of ETFs and their Uses
Like their second cousins, traditional mutual funds, ETFs come in
several different formats:

Open-end ETFs. This is the most popular structure among spon-

sors, given that open-end ETFs are legally allowed to own deriva-
tives (and are allowed to loan out their securities to short sellers,
which creates an additional income stream for the sponsors). Open-
end ETFs pay quarterly distributions, which can be reinvested.

ETF Unit Investment Trusts (UITs). Some of the first ETFs were
formed as unit investment trusts, which are chartered for a set
period of time (usually 125 years). But ETF UITs cant invest in
options or futures, which has limited their popularity among institu-
tional investors and hedge funds.

Closed-end ETFs. These funds issue a set number of shares at

launch. The funds manager can only sell more shares by giving the
initial shareholders the right to buy new common shares at preset
prices, which are usually discounted to boost participation.
Investors in ETFs can exe-
cute all of the same moves
they do with stocks, including
market orders, limit orders, stop
orders, short sales and margin
purchases.
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Grantor Trusts. These funds are designed to follow an index at

inception, but dont necessarily adjust to any later changes in the
composition of the index. With Grantor Trusts, you can own the
basket of stocks as a single assetor unbundle them to own each
of the underlying stocks. That enables you to trade the stocks indi-
vidually to meet your tax or investment goals. The best-known ETF
Grantor Trusts were the 17 different HOLDRs created by Merrill
Lynch, but which ceased trading in December 2011.

Actively Managed ETFs. For now, actively managed ETFs can only
be found in Europe, since the SEC hasnt approved them in the
United States. One of the sticking points between the SEC and ETF
sponsors is how quickly the sponsors must announce any changes
to their portfolio. While managers of active ETFs in Europe disclose
portfolio changes to market makers two days laterand to
investors, two months laterthe SEC has insisted on more timely
disclosure. That isnt sitting well with US mutual fund managers,
who are accustomed to disclosing their holdings only twice a year.
Today, exchange-traded funds are used by investors for many different
reasons: While small investors view them as a low-cost alternative to
more expensive sector funds, institutions and hedge funds sometimes
use ETFs to quickly equitize unallocated client fundsmaintaining
market exposure when, for instance, part of a clients existing portfolio
is sold to harvest a tax loss. Investment professionals also use exchange-
traded funds as a legal way of avoiding the wash sale rule, a US tax
law that prohibits taxpayers from claiming an investment loss if they
purchase the same investment 30 days before or after the sale date.
But given the plethora of exchange-traded funds, investors can easily
find comparable ETFs that provide the desired exposurewithout
jeopardizing their tax loss.
Leveraged ETFs: Flirting with Disaster?
For all of their popularity among investors, exchange-traded funds
have come under attack by some market pros and regulators who fear
that these instruments are creating more risk and instability in the
markets. A key concern among critics is liquidity, since sponsors have
sold billions of dollars of ETFs that are invested in relatively illiquid
markets such as Japanese real estate or Czech stocks. While shares in
these ETFs can be easily sold, the assets backing them may not be as
liquidand when the bids are all on one side, that can cause the mar-
kets to lock up. In this respect, its worth recalling that during the so-
called flash crash in May 2010, the Dow Jones Industrial Average
briefly plunged 1,000 points as liquidity disappeared.
For all of their popularity
among investors, exchange-
traded funds have come under
attack by some market pros and
regulators who fear that these
instruments are creating more risk
and instability in the markets.
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When regulators began cancelling trades made at unusual prices, they
discovered that as much as 70 percent of those trades were in ETFs
which was far above their true weighting in the markets. It is these
derivatives and not the phenomenon known as high frequency trading
commonly critiqued as contributing to the flash crash of May 6,
2010that pose serious threats to market stability in the future,
Harold Bradley and Robert E. Litan of the Kauffman Foundation wrote
in a controversial report published in November 2010.
11
Regulators
caution that it could happen again. In an April 2011 working paper, the
Bank for International Settlements warned that any reassessment by
investors of the liquidity of ETFs could have significant implications for
the normal functioning of financial markets.
12
To meet investor demand for illiquid securities such as emerging mar-
kets or commodities, ETF providers also have turned to synthetic
replication techniques and derivatives sold by the investment banks.
In many market segments, there is a lot of money chasing a relatively
small pool of hard financial assets, Daniel Awrey, a lecturer in law and
finance at Oxford University told The Financial Times of London. This
helps explain the demand for synthetics.
13
But critics say this approach
repeats the same risk that triggered the last financial crisis: counter-
party risk. Synthetic ETFs, which comprise roughly 40 percent of
Europes $292 billion market, expose investors to the fortunes of the
bank that issued them, not just the markets natural forces.
Challenges and Opportunities
Exchange-traded funds have exploded in popularity, and its reason-
able to believe that ETFs will continue to grow in coming years. The
trend in Europe and Australia toward fee-based advisory models
where advisers are compensated either via flat fees or on total assets
under management rather than with commissionsaugers well for
low-cost products such as ETFs. In the US, the SECs proposed limits on
the so-called 12b-1 marketing fees that mutual funds paid advisers
as incentives to distribute their products should also help level the
playing field for ETFswhose bare-bones business model leaves no
room to pay such fees. And then theres the vast 401(k) retirement mar-
ket, which remains largely untapped territory for the ETF industry.
11 Harold Bradley and Robert E. Litan, Choking the Recovery: Why New Growth
Companies Arent Going Public and Unrecognized Risks of Future Market Disrup-
tion, Ewing Marion Kauffman Foundation, 12 November 2010.
12 Srichander Ramaswamy, Market Structures and Systemic Risks of Exchange-
Traded Funds, Bank for International Settlements Working Papers, April 2011.
13 Tracy Alloway and Izabella Kaminska, UBS loss throws light on synthetic
problem, The Financial Times of London, 4 October 2011.
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But its safe to say that theres more the ETF industry can do to ensure
that the next decade is just as prosperous as the last. In the beginning,
the calling card for ETFs was their simplicity, tradeability, transparency,
and their cost advantages over traditional mutual funds. But the major-
ity of the ETFs that have been introduced in recent years are more
complex, more opaque, and potentially riskier than their predecessors.
For their part, the backers of leveraged ETFs say the fears that these
products pose systemic risks are overblown. Leveraged funds, they
point out, have roughly $40 billion in assets, which is less than 3 per-
cent of all ETF assets. Synthetic ETFs represent another $140 billion in
assets. Together, thats $180 billionwhich is roughly 12 percent of all
ETFs. By contrast, subprime mortgages represented more than 60 per-
cent of the massive wave of foreclosures in 2007 that helped trigger
the financial crisis the following year.
14
Regulators, says WisdomTree
Investments CEO Jonathan Steinberg, are looking for a scapegoat for
the volatility.
15
The challenge for regulators and the industry alike is to restore the
transparency that was the hallmark of these products, so that investors
are very clear on what theyre buying. That means fund names that tell
prospective investors right away whether an ETF contains derivatives or
any other synthetic replication techniques. The collateral that the ETF
providers are required to hold should be disclosed as welland should
consist of the same securities and assets in the fund.
Last, ETF sponsors must make sure they have the people, processes
and technology that will be needed going forward. Up to now, more
than a few ETF sponsors were able to grow just by picking the low-
hanging fruit. That easy growth enabled many sponsors to coast along
with non-standard technology, undocumented processes, undefined
roles and risk controls that were created on the fly. But the competition
has gotten tougher, and only the players with a focused strategyand
the ability to execute itwill thrive going forward. Which means that,
much like the patient looking at an inkblot, the ETF industry can divine
whatever it chooses in its future.
14 Sam Khater, The Role of Subprime Loans in Foreclosure Volumes, The Market-
Pulse, CoreLogic, 18 January 2012.
15 Jessica Toonkel, WisdomTree CEO defends leveraged ETFs, Reuters,
12 September 2011.
ETF sponsors must make
sure they have the people,
processes and technology that
will be needed going forward. Up
to now, more than a few ETF
sponsors were able to grow just
by picking the low-hanging fruit.
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Lexicon: The Etymology of ETFs
The explosive popularity of ETFs has introduced a whole new terminol-
ogy into the trading world. Here is a guide to some of the most com-
mon terms in ETFs:
BasketA bundle or group of securities. The securities within an ETF
are sometimes referred to as a basket.
Creation UnitThe smallest block of shares in an ETF that investors
or more commonly, fiduciariescan purchase or redeem directly from
the fund sponsor at the ETFs net asset value. Creation units are usually
transacted in increments of 50,000 shares, which limit their market to
large institutions and other authorized participants. Instead of cash, the
seller of a creation unit would receive a basket of securities that corre-
sponds to the portfolio holdings in a particular ETF. This in-kind
transfer process is unique to ETFs and doesnt create tax consequences
for the seller.
Enhanced ETFsFunds that were designed around an index but dont
intend to track it verbatim. The most common versions of Enhanced
Funds are Leveraged ETFs and Short ETFs.
Exchange-Traded Note (ETN)ETNs are unsecured debt securities
that pay a return tied to the performance of a single security or index.
ETNs can be traded before maturity on an exchange, but investors that
hold their ETN to maturity receive a cash payment calculated from the
initial trade date to the maturity date (minus the annual expense ratio).
ETNs usually dont pay a dividend or annual coupon and they have
maturity dates that can range up to 30 years. One issue is that ETNs
are subject to counterparty risk, meaning that the creditworthiness of
the sponsor can affect the notes final return and value.
Grantor TrustAn ETF that from inception follows an index but
remains static and may not reflect any changes in the composition of
the underlying index. The type of fund structure allows investors to
retain their voting rights on the underlying securities within the fund.
HOLDRs are structured as Grantor Trusts.
Index Participation SharesETFs were born in the form of Index
Participation Shares, a simple proxy for the S&P 500 Index that began
trading on the American Stock Exchange and Philadelphia Stock
Exchange in 1989. The Chicago Mercantile Exchange and Commodity
Futures Trading Commission sued to stop their trading, arguing that
they were futures contracts and hence, required by law to trade on a
futures exchange regulated by the CFTC, and not a stock exchange. A
federal court in Chicago agreed and IPS trading was shut down.
advent.com 13
Indicative ValueA measure of the intraday net asset value (NAV) of
an ETF, which provides an updated measure of the value of the fund
based on its assets less its liabilities. The NAV for an ETF is usually cal-
culated at the end of each trading session, but the Indicative NAV
provides a real-time view of this value. Note that the Indicative NAV
is not the price at which you can purchase an ETF, and may deviate
slightly from the real NAV due to such factors as supply and demand.
The symbol for most indicative values is the ETF ticker symbol with
an .IV (ETF.IV)
iSharesA group of ETFs advised and marketed by BlackRock. iShares
are structured as open-end mutual funds.
Leveraged ETFAn ETF that uses debt and financial derivatives to
magnify the returns of an underlying stock, bond or commodity index.
Most leveraged ETFs attempt to duplicate daily index returns by two or
three times, and short leveraged ETFs attempt to do the same in the
opposite direction. Leveraged ETFs are available for most indexes,
including the NASDAQ 100 and the Dow Jones Industrial Average.
Qubes (QQQ)An ETF that tracks the tech-heavy NASDAQ 100
index. The nameand better-known nickname (Qubes)comes from
the ETFs ticker symbol, QQQ. Qubes are structured as unit investment
trusts.
Short ETFsAlso known as Inverse ETFs or Bear ETFs, these
funds use various derivatives to deliver the opposite or inverse per-
formance of a particular indexwith the intent to profit from a decline
in the value of the underlying benchmark. Investing in these types of
funds is akin to holding various short positions, except that Short ETFs
do not require investors to hold a margin account, as is the case for
investors who enter into short positions.
SPDRsA group of ETFs (managed by State Street Global Advisors )
that track the S&P 500 and other stock, bond and commodity indices
and sectors. The initial SPDR Trust, Series 1, was structured as a unit
investment trust, but Select Sector SPDRs are open-end funds.
Unit Investment TrustA common form of ETFs that requires the ETF
sponsor to create an exact duplicate of the underlying index, with no
use of derivatives. This type of fund doesnt reinvest dividends, but
instead pays them out to shareholders via a quarterly cash distribution.
That could result in an ETF that sometimes deviates from the exact
composition of an index. The best-known examples include SPDRs
and QQQs.
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[UK] 127133 Charing Cross Road, London WC2H 0EW, UK / PH +44 20 7631 9240
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