Navigating Today’s ETF Landscape Daniel Prince, CFA Head of iShares Product Consulting
September 2018
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Agenda
Why use ETFs Opportunities in today’s landscape
Considerations for selecting ETFs
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Why use ETFs
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Transactions in shares of ETFs will result in brokerage commissions and will generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders. For more information on the differences between traditional mutual funds and ETFs, see Appendix.
STOCK TRADABLE DURING THE DAY
ETFs DIVERSIFIED FUNDS
THAT TRADE LIKE STOCKS
MUTUAL FUND DIVERSIFIED
Like a stock, an ETF can be bought and sold
whenever the market is open
Like a mutual fund, an ETF is typically a collection of stocks
or bonds and professionally managed
ETFs offer a low cost, diversified, tax efficient way to invest
ETFs offer the best of both worlds
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Why do investors use ETFs?
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Diversification
Tradability and flexibility
Cost effectiveness Tax efficiency
Knowing what you own
Performance vs. active funds
Manage risk
Keep more of what you earn
Seek to outperform other investments
Expressing a view
Return Risk
Costs (and taxes)
Past performance does not guarantee future results. Diversification may not protect against market risk. Transactions in shares of iShares funds may result in brokerage commissions.
Return Risk
Cost (and taxes)
Total Performance™
Implicit and explicit costs
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Global ETF industry growth
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Source: BlackRock and Bloomberg, 6/30/2018. 1Source: EY, Reshaping around the investor: Global ETF Research 2017.
• ETF Industry assets have been growing every year since 2009
• Globally, ETFs assets have increased over 190% the last six years
• Project the global industry assets under management will rise to over $7.6 trillion by 20201
iShares $1.77tn
Projected >$7.6tn1
Industry $4.94tn
2020 est.
Global ETF assets under management
Forecasted growth1
0
1000
2000
3000
4000
5000
6000
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Four trends empowering ETF investors
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1. BlackRock; Global Business Intelligence, as of April 2018
Potential global ETF asset growth trajectory1 1. ETF investors are active investors
2. Investors are sensitive to cost
3. A transformation in the business model for financial advice
4. An evolution in the way bonds trade favors
ETFs for efficient access Global ETF assets are predicted to grow to $12T by 20231
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Opportunities in today’s landscape
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Smart Beta ETFs: the intersection of index and active
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Designed to track an index and are rules-based Generally low cost and transparent Can be a potential source of additional return or a way to help manage risk Can potentially help achieve a desired outcome such as dampening the impact of market volatility or pursuing higher income
Smart Beta
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US Smart Beta assets have grown rapidly since 2009
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$13 $25 $42 $58 $86 $103 $94
$129 $161
$7 $13 $10
$13
$22 $28 $29
$36
$46
$2 $4
$3 $3 $4
$7
$10
$6 $11
$15 $24
$36
$46
$7
$10
$23
$34 $40
$46
$66
$5 $4
$5
$9
$14 $16
$20
$29
$-
$50
$100
$150
$200
$250
$300
$350
$400
2009 2010 2011 2012 2013 2014 2015 2016 2017
Ass
ets
($B
illion
s)
Dividend Equal Weight Fixed Income Low Volatility Multi-Factor Single Exposure
$357.9
$26.9
Total US Smart Beta Assets by Category
Source: BlackRock, iShares Global Business Intelligence. Data as of December 31, 2017
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Factor-based investing focuses on potential drivers of returns
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Macro Factors:
Style Factors:
Alpha: Only managers with skill have historically generated consistently positive returns
• Economic Growth • Credit • Inflation
• Real rates • Liquidity • Emerging Markets
• Value • Momentum • Quality • Size
• Low Volatility • Carry • Curve
• Security selection • Country and
industry selection • Market and factor
timing
Sources of return can be broken down into macro factors, style factors and pure alpha
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What are factors and why have they worked?
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Our funds seek to track indexes that employ intuitive screens that active managers have used for generations, but offer similar cost benefits to traditional market cap weighted ETFs.
Invests in companies with healthy balance sheets
Invests in stocks that are cheap relative to fundamentals
Invests in stocks on an upswing
Quality
Value
Momentum
Minimum Volatility
• Return on equity • Earnings consistency • Debt to equity
• Price/forward earnings • Price/book • Enterprise value/cash flow
• Risk-adjusted price momentum
Invests in stocks that have collectively exhibited lower volatility
• Measures volatility of each stock in the broad market index
• Analyze correlations between stocks, sectors and countries
Reduce risk
Factor Objective Screens
Seek outperformance
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ETFs offer on demand access to virtually all sectors of the fixed income market
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In the US, 36 providers now offer 336 fixed income ETFs
Source: BlackRock, Bloomberg, as of 12/31/17. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.
$0
$100
$200
$300
$400
$500
$600
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
AUM
($ b
n)
Government Inflation-Linked IG Credit High Yield Govt/Credit Aggregate
Leveraged/Inverse Mortgage Municipals Active Short International/EM Term maturity
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Fixed Income market penetration is still very low
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• The U.S. fixed income market is 1.75x the size of the equity market
• However, Fixed Income ETF penetration is only one-eighth the level of equity ETF penetration
While U.S. equity ETFs are 9% of total US equities… …U.S. Fixed Income ETFs are 1.2% of the total market
Source: BlackRock, Bloomberg, Morningstar, as of 6/30/18.
Total U.S. equity market = $30.2T Total U.S. Fixed Income market = $52.8T
U.S. Fixed Income Mutual Funds, 7.36%
U.S. Fixed Income ETFs,
1.15%
U.S. Equity ETFs, 9.22%
U.S. Equity Mutual Funds,
31.42%
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Fixed income ETF trading volume
15
0
20
40
60
80
100
120
140
160
180
200
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Trad
ing
Volu
me
($bn
)
Total Trading Volume
Liquidity is like oxygen: You don’t notice it until it’s gone • Credit crisis of 2008 placed a premium on liquid investments and
liquid investment vehicles.
• Since 2008, fixed income ETFs trading volume has grown at 23% CAGR.
Provider support for liquidity • Tight bid/ask spreads in conjunction with deep, liquid markets are
ideal for all investors.
Fixed income ETF trading volume (total monthly)
Source: BlackRock and Bloomberg as of 12/31/2017. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.
Financial Crisis
European Debt Crisis
US Treasury Downgrade
Taper Tantrum Oil Sell Off (2014)
High Yield Sell-Off (2015)
During each of these stressed periods, many ETFs have displayed:
INCREASED VOLUMES
DISCOUNTS TO NAV
NO FORCED SELLING
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What role can Fixed Income play in a portfolio?
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Capital Appreciation Pursue opportunities to be compensated for illiquidity, opacity and/ or complexity
Capital Preservation Seek protection of principal and manage volatility
Income Generation Expanding the Fixed Income toolkit may help increase the yield of a portfolio
Diversification Negative correlation to traditional equities may help reduce total portfolio volatility
Liability Matching Outcome oriented approach to tracking plan liabilities while seeking return in a risk-
managed framework
Source: BlackRock. Investment involves risk. Diversification and asset allocation may not fully protect you from market risk.
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Fixed income ETF toolkit
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IUSB AGG HYG MUB SHYG NEAR IGSB FLOT LQD EMB PFF
Core bonds and municipals Short duration strategies High yield, EM bonds and preferred
Diversify equities Put cash to work Seek to generate income
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Considerations for selecting ETFs
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A framework for evaluating ETFs
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How well do you know your manager / provider? Manager
Structure
What’s inside your fund? What goals are you trying to accomplish? Exposure
What does it cost? Costs
2
What are the implications of structure?
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Managing index exposure
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Putting indexes together
For illustrative purposes only – market cap spectrum not to scale.
S&P 1500
S&P Midcap
400
S&P Small
Cap 600
S&P 500
Russell Large-Cap
1-1000
Russell 2000
Russell 3000
1-3000
Russell Midcap
201-1000
Russell Microcap
Russell 200
1-200
MSCI Mid Cap
450
MSCI Small Cap
1750
MSCI Large
Cap 300
MSCI Prime
Cap 750
MSCI Broad Market Index
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Due Diligence Case Study – Two Emerging Markets Indexes Can Vary
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Source: MSCI, FTSE, Morningstar as of 4/30/2018
0.90% 0.11%
5.05%
-0.05%
0.04% 0.02%
-0.08%
-0.06%
1.94%
-0.03%
-15.92% -16%
-13%
-10%
-7%
-4%
-1%
2%
5%
*denotes traditionally non-in-kindable countries
Brazil*
Chile
China
Colombia
CzechRepublic
Egypt
Greece
Hungary
India*
Indonesia
Korea*
-5.09%
4.45%
-1.40%
0.06%
2.17%
-0.05% -0.83%
1.16%
-1.04%
0.14%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%Technology
Financials
Consumer Discretionary
Materials
Energy
Consumer Staples
Industrials
Telecommunications
HealthCare
Real Estate
-0.50.00.51.01.52.02.53.0
Rolling 12 Month Tracking Error Excess Annualized St Dev (%)
MSCI EM IMI NR USD
FTSE Emerging NR USD
Relative country exposure difference in % (MSCI EM IMI Index – FTSE EM Index)
Relative sector exposure difference in % (MSCI EM IMI Index – FTSE EM Index)
Notables Differences:
MSCI Index had a 15.5% to South Korea where FTSE EM Index has no exposure to South Korea
MSCI EM Index has a larger weight to Technology & Consumer Discretionary
Country and Sector differences can impact returns
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Expense ratio is only one part of the total cost of ownership
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Implicit costs Total costs Explicit costs
Trading costs
Performance vs. benchmark (tracking difference)
Taxes on distributions
When faced with a choice among ETFs in a category, consider all explicit and implicit costs
Expense ratio
Brokerage commission
Purchase price
Maintenance
Fuel efficiency
Insurance
Costs to consider:
Total cost of car ownership
Explicit costs are predetermined based on the ETF’s fees and brokerage firm’s commission schedule. Implicit costs may vary based on market events and trading volume. Implicit costs may change continuously based on current market conditions.
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Key takeaways
Investors can use ETFs to help build a stronger portfolio in today’s investment landscape Fixed Income ETFs can help diversify
equities, put cash to work, and generate income
Smart Beta ETFs can help dampen the impact of market volatility or help investors pursue higher income relative to the market
ETFs are funds that trade like a stock, which can be bought and sold whenever the market is open
ETFs are a diversified, low cost, and tax efficient way to invest
There are many choices available in ETFs today, so doing your homework on them is important. Be intentional, and know your manager and the risks you are taking
Explore all 240 commission-free* iShares ETFs at
fidelity.com/etfs/ishares
*ETFs are subject to a short-term trading fee by Fidelity, if held less than 30 days. Other conditions and fees may apply. BlackRock is not affiliate with Fidelity or any of their affiliates.
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Important iShares disclosures
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Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing.
Investing involves risk, including possible loss of principal. Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency and its return and yield will fluctuate with market conditions. Securities with floating or variable interest rates may decline in value if their coupon rates do not keep pace with comparable market interest rates. A fund’s income may decline when interest rates fall if most of the debt instruments held by the fund have floating or variable rates. There is no guarantee that dividends will be paid.
When comparing stocks or bonds and iShares Funds, it should be remembered that management fees associated with fund investments, like iShares Funds, are not borne by investors in individual stocks or bonds. The annual management fees of iShares Funds may be substantially less than those of most mutual funds. Buying and selling shares of iShares Funds will result in brokerage commissions. Although market makers will generally take advantage of differences between the NAV and the trading price of iShares Fund shares through arbitrage opportunities, there is no guarantee that they will do so.
International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets, in concentrations of single countries or smaller capital markets. Narrowly focused investments, including REIT, mining, preferred stock, factor and floating rate note funds may be subject to higher volatility and risks specific to those sectors. The iShares Minimum Volatility ETFs may experience more than minimum volatility as there is no guarantee that the underlying index's strategy of seeking to lower volatility will be successful.
Investment in a fund of funds is subject to the risks and expenses of the underlying funds.
Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
Important information regarding iShares ETFs
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Actively managed funds do not seek to replicate the performance of a specified index and may have higher portfolio turnover than index funds.
A fund's use of derivatives may reduce a fund's returns and/or increase volatility and subject the fund to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. A fund could suffer losses related to its derivative positions because of a possible lack of liquidity in the secondary market and as a result of unanticipated market movements, which losses are potentially unlimited. There can be no assurance that any fund's hedging transactions will be effective.
The iShares Funds are distributed by BlackRock Investments, LLC.
iShares ETFs are not sponsored, endorsed, issued, sold or promoted by Barclays, Bloomberg Finance L.P., BlackRock Index Services, LLC, Cohen & Steers Capital Management, Inc., European Public Real Estate Association (“EPRA® ”), FTSE International Limited (“FTSE”), India Index Services & Products Limited, Interactive Data, JPMorgan Chase & Co., Japan Exchange Group, MSCI Inc., Markit Indices Limited, Morningstar, Inc., The NASDAQ OMX Group, Inc., National Association of Real Estate Investment Trusts (“NAREIT”), New York Stock Exchange, Inc., Russell or S&P Dow Jones Indices LLC. None of these companies make any representation regarding the advisability of investing in the Funds. With the exception of BlackRock Index Services, LLC, who is an affiliate, BlackRock Investments, LLC is not affiliated with the companies listed above. “FTSE®” is a trademark of London Stock Exchange Group companies and is used by FTSE under license.
The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.
This material is not intended to be a recommendation or advice by BlackRock. If this material were construed to be a recommendation by BlackRock, BlackRock would seek to rely on Department of Labor Regulation Section 2510.3-21(c)(1). As such, by providing this material to you, a plan fiduciary that is independent of BlackRock, BlackRock does not undertake to provide impartial investment advice or give advice in a fiduciary capacity. Further, BlackRock receives revenue in the form of advisory fees for our mutual funds and exchange traded funds and management fees for our collective investment trusts.
©2018 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.
Important information regarding iShares ETFs
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Important information regarding iShares Factor ETFs
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There can be no assurance that performance will be enhanced for funds that seek to provide exposure to certain quantitative investment characteristics ("factors"). Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. In such circumstances, a fund may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses.
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Disclosures
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The information included in this material has been taken from trade and other sources considered to be reliable. We do not represent that this information is accurate and complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our analysis at this date and are subject to change.
©2018 BlackRock. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock. All other marks are the property of their respective owners.
The information provided in this communication is solely for educational purposes and should not be construed as advice or an investment recommendation. Fidelity Investments is a separate company, unaffiliated with BlackRock, Inc. There is no form of partnership, agency affiliation, or similar relationship between BlackRock, Inc. and Fidelity Investments, nor is such a relationship created or implied by the information herein. Fidelity Investments has not been involved with the preparation of the content supplied by BlackRock, Inc. and does not guarantee or assume any responsibility for its accuracy or completeness.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
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