ETF EssentialsInside the ETF revolution

Jack FowlerVice President, iShares

Agenda

• Growth and Evolution of the ETP Market

• Recap: What is an ETF?

• Advantages of ETFs

• ETF Structures

• ETF Trading and Total Cost of Ownership

• Four Steps to ETP Selection

• Practical uses of ETFs

Growth and Evolution of theETP Market

Global ETP multi-year asset growth

European ETP multi-year asset growth

Europe vs. US – ETF Providers

ETF managers in Europe by AUM ETF managers in the US by AUM

Source: Global ETF Research and Implementation Strategy Team, BlackRock, Bloomberg. As at Sept 28 2012.

What is an ETF?

What is an ETF? Two great investment ideas brought together

ETFs

DiversifiedTradable during the

day

Diversified funds that trade

like stocks

Mutual FundStock

ETFs are index funds….They are listed and traded like a stock on major stock exchanges globally

Single Stock / Future

• Trading flexibility on exchange

• Intraday pricing

• Listed options

• Ability to borrow / short

• Any transaction size

• Variety of trading strategies

Index Fund

• Simplicity

• Transparency

• Risk control

• Cost control

• Consistency of returns

• Diversification

• Mutual Fund

• Open-End Fund

Exchange Traded Fund

+

ETFs occupy a unique position in the investment landscape: The intersection between and index fund and a listed security

Advantages of ETFs

Why are ETFs so popular?

Transparency • Investors know the ETF holdings, price and costs

Liquidity

• ETFs offer two sources of liquidity:

• Traditional liquidity measured by secondary market trading volume

• Multi dealer model boosts the liquidity of iShares ETFs

Diversification• ETFs provide immediate exposure to a basket or group of securities for instant diversification

• Broad range of asset classes including equities, bonds, commodities, investment themes, etc

Flexibility• ETFs are listed on exchanges and can be traded at any time the market is open

• Pricing is continuous throughout the day

Cost effectiveness • ETFs offer a cost-effective route to diversified market exposure

Physical Based ETFs

Source: iShares website as at 17/09/12 and is for illustrative purposes only

Example for Illustrative Purposes : iShares FTSE 100 Physical based ETF

Portfolio Managers purchase stocks to

represent the index

Exchange Traded Fund

Equity Market Volatility: Days with market move of more than 2%For professional clients / qualified investors only

Source: Bloomberg as at 18/09/12

Diversification with ETFs

Equities Fixed Income Alternatives Cash & Cash Alternatives

Commodities

World UK Gilts Property Short Term Treasuries

Broad

Developed Markets

International Government

Private Equity Precious Metals

Emerging Markets Index-Linked Gilts Global Water Commodity Producers

Large, Mid, Small-cap

Corporate

Growth Value Covered

UK Equity

ETF Structures

Structure

Exchange Traded Products (ETPs)

Exchange Traded Funds (ETFs)

• Physically replicating ETFs:

– Fully replicating

– Optimised/partially replicating

• Derivative replicating ETFs

Exchanged Traded Notes (ETNs)/Exchanged Traded

Commodities (ETCs)

Exchange Traded Instruments (ETIs)

• Different types of ETPs imply different levels of complexity and carry different structural risks. It is important for investors, especially the retail investor, to be aware of these risks.

Structure Prioritisation

Can we run it as a normal fund?

Fund holding physical securities

CommentsVehicle Choice

If not physical fund, will swaps be possible?

Fund holding swaps

Can this asset be practically stored?

Note backed by the physical asset

Will an institution guarantee the return?

Note backed by an institution’s credit

Can this product idea comply with

UCITS?

Compliance with the European Union UCITS Directive is critical to market funds from one EU country in other EU countries and UCITS demonstrates independent oversight and diversification

UC

ITS

No

n-U

CIT

S

Physical ETF

Derivativereplicating ETF

Physical ExchangeTraded Commodity

ExchangeTraded Note

Physical-based ETFs

Replicated

Optimised

Source: BlackRock. For illustrative purposes only.

For example: iShares FTSE 100 iShares EURO STOXX 50 iShares S&P 500

For example: iShares MSCI World iShares Barclays Capital

Euro Aggregate Bond iShares MSCI Emerging

Markets

Two types: replicated and optimised

Swap-based ETF

Source: BlackRock. For illustrative purposes only.

Key features:

Ability to construct UCITS compliant ETFs which are impossible to create with the physical structure

Full transparency (collateral, swap counterparties, swap exposure etc)

Good quality, UCITS-compliance collateral with an extra margin

Diversified counterparty exposure They are still not physical-based

ETFs

Multiple counterparties and over collateralised swap exposure?

Exchange Traded Commodities

For professional clients / qualified investors only

• iShares defines ETCs as debt securities that are backed by fully-allocated physical holdings of precious metals held in secured vaults

• Many ETCs are eligible for investment by UCITS but are not themselves units in a collective investment scheme as defined by the UCITS directive

• iShares ETCs’ assets are held in ring-fenced segregated accounts

• ETCs are typically backed by metal held in secured vaults

ETF Trading andTotal Cost of Ownership

23

How traditional mutual funds work

StockExchangeMutual Fund

Investors interact with the fund to buy or sell shares

Buyers

Sellers

24

ETFs work differently than traditional mutual funds

StockExchange

iShares

Investors buy and sell on an exchange and

are insulated from each other’s actions.

“Authorized participants”

Buyers

Sellers

Basic model for access

ETF

On a platform

Through a brokerPrivate

ClientAdviser

Generally ETFs are traded between brokers on the secondary market.

26

Compare volume and “on-screen” bid/offer data to total potential liquidity

Incr

easi

ng L

evel

s of

Liq

uidi

ty

Creation/Redemption

Liquidity

(Underlying Basket)

Secondary Market ADV

Primary Market

Market Maker

Indications of

Liquidity

ETF Market Depth

• Generate Transaction Cost Analysis (TCA) and provide limit order guidance

• Help source liquidity through relationships with 200+ specialist market makers

Identify available liquidity through 50+ APs via the creation/redemption process

For illustrative purposes only.

Trading and LiquidityiShares Capital Markets Group can assist clients with accessing each layer of liquidity.

Passive Market Growth = More Passive Providers

Lower TER = Lower Total Costs

Total Cost of Ownership

New Providers = More Competition

New Providers More Competition = Lower TERs

= More Competition

Total Cost of Ownership

The true cost of owning an ETF

• Total Cost of Ownership:

– Is NOT just TER.

– Can be broken down into both internal as well as external factors.

• BlackRock believes Total Cost of Ownership is an accurate measure of investing in an ETF.

Internal factors

Physicalreplicating

funds • Trading spreads.

• Creation/redemption.

• Brokerage fees.

• Tax.

External factors

Total Cost of

Ownership

Derivativereplicating

funds

• Total Expense Ratio (TER).

• Swap spread.

• Securities lending revenue.

• Total Expense Ratio (TER).

• Rebalancing costs.

• Securities lending revenue.

+ =

Total Cost vs. TER – A Selection of iShares ETFs

Source: BlackRock, Bloomberg. Data as at end of March 2012.

Total Expense Ratio vs. Total Cost of Ownership

Four Steps to ETP Selection

Four Steps to ETP Selection

Evaluate the ETP Provider

Rule in and Rule Out Criteria: Tax, Legal and Compliance

Evaluate the Product Structure

Select the Product

1

2

3

4

Introducing iShares Due Diligence Framework

1. Evaluate the ETP provider

2. Quick rule in rule out criteria

3. Evaluate the product structure

4. Select the product

GeneralPerformance:

tracking error andtracking difference

Trading and valuationTotal Cost

of Ownership

Four Steps to ETP Selection

Practical uses of ETFs

Why do financial professionals use ETFs?

Diversification

Tradability and flexibility

Cost effectiveness

Tax efficiency

Transparency

Performance vs. active funds

Manage risk Spend less, save more

Seek to outperform other investments

Express a view

Return Risk

Costs

Practical uses of ETFs

Implementing Core / Satellite Strategies

Core - passively managed vehicles, such as ETFs or traditional index pooled funds lend themselves ideally to the core component of an investment portfolio due to four main reasons:

•Broad diversification by closely mirroring asset class benchmarks

•Consistent performance relative to a benchmark

•Low costs

•Improved risk management

Satellites - are typically more specialised investments which serve as active tools to deliver additional returns (alpha). ETF satellites have a number of advantages:

•Precise exposure to a wide range of discrete market sectors, specific styles or market capitalisations indices.

•Exposure to selected market segments at low costs

•Eliminating security selection or manager selection risk

Active Strategy 2

Active Strategy 3

Active Strategy 1

ETFs

ETF Satellite

ETF Satellite

ETFSatellite

Portfolio

Strategic and tactical

Strategic Model Portfolio

Thematic Model Portfolio

Tactical Model Portfolio

Add short-term

views

Express thematic

views

For illustration purposes only. 

iShares Advantage

Who is BlackRock?

BlackRock’s capabilities are built around our clients’ greatest needs:

Client focus

• We partner with clients and their advisers to build portfolios that reflect their objectives, risk tolerance and time horizons

Broader capabilities for better outcomes

• We provide an industry-leading breadth of investment solutions across active management, quantitative, and index strategies, including our iShares® ETFs

• A dedicated group—BMACS—creates customized, multi-asset solutions to address specialized needs

Global insights to uncover opportunities

• Some 100 investment teams in 27 countries share their best thinking to gain the insights that can change outcomes

Culture of risk management

• BlackRock’s risk management team works with portfolio managers while remaining truly independent, so their recommendations are unbiased and portfolio managers can make more informed decisions

BlackRock is a truly global firm that combines the benefits of worldwide reach with local service and relationships. We manage assets for clients in North and South America, Europe, Asia, Australia, the Middle East and Africa. The firm employs more than 10,100 talented professionals and maintains offices in 27 countries around the world. As of Q3 Earnings Report, BlackRock's assets under management total US$3.673 trillion across equity, fixed income, cash management, alternative investment, real estate and advisory strategies.

Expertise across asset classes

Source: $3.67 trillion in assets as of 30 September 2012 includes commodity and currency mandates

BlackRock historical perspective

1 2 4 8 17 23 53 69 83 105 131165

204239

273309 342

452

1,125

1,357

3,6843,513

1,307

3,3463,561

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

1Q

12

2006: Merger of BlackRock and MLIM

2005: State Street Research and Management acquisition2000: Launched

BlackRock Solutions®

1999: IPO (NYSE: BLK) Broad employee ownership

1988: Founded Blackstone Financial Management

1992: Changed name to BlackRock

1995: Merged with PNC, offered common vision & fund platform

2007: Quellos Group, LLC acquisition

2008: Launched Financial Markets Advisory Business

2009: Mergerof BlackRock and BGI;

Hired Professionals from R3 Capital Partners`

1998: Integrated equity, fixed income, liquidity, and mutual funds under BlackRock name

Assets under management ($ billions)

2008: Launched Financial Markets Advisory Business

What sets iShares ETFs apart?

Our Focus

Our Experience

Our Scale

+

+

Total Performance philosophy

Holdings published daily

Award-winning website

Largest ETF provider in the world

607 ETFs listed globally

$711.8 billion in assets1

Source: ETP Landscape Industry Highlights Montly Report September 2012

Part of BlackRock, the world’s largest asset manager

Over 40 years of indexing experience

Deep roots in every world region

Return Risk

Costs

iShares ETP Due Diligence Guide Key questions

Structure

Tax

Performance

Trading

Total Cost of Ownership

Securities Lending

iShares Four Steps to ETP Selection

Due Diligence Resources and Tools

Q & A

DisclaimersRegulatory InformationBlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Services Authority ('FSA'), registered office at 12 Throgmorton Avenue, London, EC2N 2DL, England, Tel +44 (0)20 7743 3000. iShares plc, iShares II plc, iShares III plc, iShares IV plc, iShares V plc and iShares VI plc (together 'the Companies') are open-ended investment companies with variable capital having segregated liability between their funds organised under the laws of Ireland and authorised by the Financial Regulator.

Restricted InvestorsThis document is not, and under no circumstances is to be construed as an advertisement or any other step in furtherance of a public offering of shares in the United States or Canada. This document is not aimed at persons who are resident in the United States, Canada or any province or territory thereof, where the companies/securities are not authorised or registered for distribution and where no prospectus has been filed with any securities commission or regulatory authority. The companies/securities may not be acquired or owned by, or acquired with the assets of, an ERISA Plan.

Risk WarningsInvestment in the products mentioned in this document may not be suitable for all investors. Past performance is not a guide to future performance and should not be the sole factor of consideration when selecting a product. The price of the investments may go up or down and the investor may not get back the amount invested. Your income is not fixed and may fluctuate. The value of investments involving exposure to foreign currencies can be affected by exchange rate movements. We remind you that the levels and bases of, and reliefs from, taxation can change.

BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. The data displayed provides summary information, investment should be made on the basis of the relevant Prospectus which is available from your Broker, Financial Adviser or BlackRock Advisors (UK) Limited. We recommend you seek independent professional advice prior to investing.

In respect of the products mentioned this document is intended for information purposes only and does not constitute investment advice or an offer to sell or a solicitation of an offer to buy the securities described within. This document may not be distributed without authorisation from BlackRock Advisors (UK) Limited.

The Dublin domiciled funds which include the term ‘swap’ in their names are swap based funds. These funds enter into fully funded swap agreements with counterparties to obtain the performance of the funds’ respective benchmarks. Swap transactions are subject to the risk that counterparties may default on their obligations. If this were to occur, the relevant fund may sustain a loss. The funds intend to mitigate much of their credit risk exposure to each counterparty by obtaining collateral from the counterparty which will be held by a third party collateral agent. In the event of a default by a counterparty or collateral agent, the swap funds may still have some counterparty risk exposure to the defaulting counterparty or collateral agent respectively. In some circumstances, counterparties can terminate the swap agreements early which may impact the returns of the funds. In addition, the counterparties may seek to pass on any additional costs relating to the hedging of their risk exposure under the swaps to the relevant fund. In the event that a swap fund is unable to enter into suitable swap arrangements or maintain swap arrangements on acceptable terms, the fund may not be able to achieve its investment objective and policy unless it is able to track its benchmark by other means.