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ExchangETradEd Funds
a totoy e to
December 2012
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Ee Te o tble a discussion
about ETFs with our panel o experts.
dym et lloto Manooj Mistry
o Deutsche Bank talks about the choices
available with ETFs.
Te Powe o Fmetl Ravinder Azad
o Invesco reviews the stock markets.
Te ETF Boom David Stevenson gives an
overview o the ETF market.
The ETF BoomDynamic asset allocation20 24
alle Tt sv Lmte
PO Box 164,
8 West Marketgait
Dundee DD1 9YP
Tel +44 (0)1382 573737
F +44 (0)1382 321183
Eml [email protected] www.alliancetrustsavings.co.uk
14
20
22
24
helpul insight direct rom investment proessionals.
Guest experts provide their views in eature articles rom
HSBC, Deutsche Bank and Invesco PowerShares, whilst
our article gives you the practicalities o investing in
ETFs a how to guide.
I hope you enjoy this ETF special edition, and would
like to hear rom you about any other products or
developments you would like urther inormation
about. Please send any eedback or suggestions to
Gay mLuki
Marketing Director
Alliance Trust Savings
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n the good old days, investors
looking to buy exposure to a major
market like the FTSE 100 or the
American S&P 500 had two simple choices
buy an actively managed und that invested
in the companies in this index, or buy the
actual companies in the index as individual
stocks. Plenty o investors have continued to
stick with this traditional style o investing
but a much cheaper and hugely popular
alternative (in the USA at least) has emerged
in recent years. This consists o investing in
a und that tracks a major index such as the
FTSE 100 or S&P 500. The actual tracking
as well discover - is very simple to
understand and involves the und manager
(or it is a und) buying the long list o
constituent stocks in the index.
The actual structure o the resulting und willvary enormously with the big choice being
between an unlisted, traditional unit trust or a
I
4 EXCHANGE TRADED | How ETFs are Structured
OvER THE pAsT DECADE A
quiET REvOluTiON HAsRippED THROuGH THE
NORmAlly AiRly plACiD
wORlD O iNvEsTmENT.
David Stevenson is a nancialjournalist and media entrepreneur.He writes the Adventurous Investorcolumn or the weekend FinancialTimes and the Contrarian column orindustry newspaper Investment Week.Hes also a regular contributor to theInvestors Chronicle and has written
a number o books on investing orthe FT and Prentice Hall includingthe main reerence book on ETFs.
David was also a senior producerin television working on arange o programmes at the BBCincluding The Money Programmeand Tomorrows World - beoresetting up the successul corporatecommunications agency The RocketScience Group. Hes now a partner inthe web TV platorm Watering Holeand is involved with helping mediacompanies raise unding through theCoalition Partners investment group.In whatever spare time he has let,David is also a magistrate and he even
nds time to edit his own investmentnewsletter called PortolioReview.
David Stevensoninetent Cont
Financial Times
sTrucTurEdhow ETF e
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London stock market listed exchange traded
und (also known as an ETF). Just to conuse
matters there are other und and productstructures with even more exotic acronyms
which well examine in a later article but or
our purposes they are all simply index tracking
unds o one shape or another.
Whatever und structure you choose, as an
investor you are simply buying the market
via an index. When compared to a traditional
active und manager such as an investment
trust there are three big dierences.
The rst and most important is that youve
decided to dispense with the services o a und
manager who will actively manage your
investments based on their own views about
the relative risks and rewards o a company in
an index such as the FTSE 100 or S&P 500. That
opens up the investor in an index tracking und
to a very specic risk which is that the index
they are tracking might be ull o absolute junk
i.e. over-priced stocks that the market has
chased up in value to ridiculous prices.
But in dispensing with the services o an active
und manager, our ETF investor has also avoided
a big risk, which is that the active und manager
has made wrong decisions about the companies
they pick. Academics have endlessly studied und
manager returns over the last 50 years and
theyve concluded that most und managers dont
outperorm the benchmark index such as the
FTSE 100 and the S&P 500. With index tracking
unds you are simply buying whatever the wider
market is choosing to buy (as measured by an
index) and doing away with the idiosyncratic
risks o opting or an active und manager.
Last but by no means least by investing in a
und that is passively managed (we use the term
passive because there is no active und manager
but simply a plan to methodically buy whatever
is in an index) you are cutting your costs very
substantially. Many investment trusts still charge
more than 1% per annum or their active
management, whilst more than a ew unit trusts
charge well over 1.5% per annum. ETFs and
index tracking unit trust unds rarely ever charge
more than 1% per annum, with most charging a
good deal less than 0.5%. That extra 1% o costs
charged by active managers can add up to a
huge amount over 10 or 20 years.
What should become apparent is that the
decision to invest in an index tracking und like
an ETF is like anything else in the world o
investment there are some specic risks which
well talk about later in this article but also somebig positives, namely lower cost, and doing away
with the risk o trusting a und manager to make
lots o (hopeully protable) trading decisions.
More and more investors here in the UK are
choosing to make use o ETFs and other index
tracking unds as part o their diversied
portolios. The key is to understand exactly
what you are buying into.
inetng n the TsE 100 index
Lets imagine that you have decided to invest in
the worlds leading blue chip equity index, whichis the American Standard and Poors 500 index.
For whatever strategic reason youve decided
that this benchmark index gives you the right
exposure to the worlds leading, prot making
companies. Youd thought about investing in
the big stocks within the index outts like
Apple and Exxon but you decided that you
wanted more diversication and didnt want to
take the risk o picking the wrong stocks.
Which ETF to invest in? There are, as you can
imagine, dozens o S&P 500 trackers, issued by
a multitude o large banks and undmanagement groups. You decide or right or
wrong to invest in the biggest o them all, in
act probably the largest ETF on the planet.
This is an American listed ETF with the
New York ticker SPY and it is managed by
a huge und management company called
State Street.
what nde the ET?
What does the und actually invest in? As you
might expect, SPY invests in the constituents othe S&P 500 benchmark US index. In the table
below State Street has listed the top ten
holdings within the index tracking und, with
amiliar names such as Apple, Exxon and
Microsot topping the list. Needless to say there
are another 490 stocks above and beyond these
top ten holdings. Youll also see that against
company is its weight within the index in the
SPY und, shares in Apple comprises 4.8% o
the total value o the und. I we were to look at
the composition o the index, there would be
almost no dierence whatsoever the contentso the ETF would track (almost perectly) the
composition o the index.
5How ETFs are Structured | EXCHANGE TRADED
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Physical tracking or replication is ne i one is
tracking a very broad, very liquid, well known
index such as the S&P 500 or the FTSE 100.These indices contain dozens o well known
names traded in the worlds leading equity
markets, where there are literally tens o
thousands o proessional institutions
operating on a real time basis.
But some indices arent quite as liquid, or
ecient. These indices might track, or
instance, Indian equities or track a very
specialised bit o the UK mainstream equity
space such as small cap emerging market
stocks that pay a high yield. Within these
specialised indices there may be all mannero complications or whatever reason,
physically tracking a specialist index might
be a tad more complicated than tracking the
FTSE 100. This neednt prevent a und
provider rom setting up a physical index
tracking und, but their management costs
might be a little higher. Also we might
begin to start worrying about something
called the tracking error.
This complex sounding term is actually
very simple to understand as it involves
measuring the returns rom the underlying
index against the returns rom the und. In
some cases a big dierence o as much as 1% a
year might emerge. There are many reasons
why this tracking error might emerge, not least
those bigger management ees, but the net
eect can be drastic. Imagine i your ETF was
tracking an index and was supposed to have
returned 5% last year but the und actually
only returned 3.5% in this example our
tracking error is 1.5%.
Top ol sPY e te*
undertandng the tracng trctre
How do the passive managers o this und pull
o this tracking? The simple answer is that they
use lots o computing power to make sure that
they constantly track the index via their und,
plus an active trading desk. I the price o a stock
declines by 10% in value on one day, bringing
its weighting within the index down rom say
4.85% to say 4.4%, the und managers at an ETF
sell their holdings o this stock to make up the
dierence and vice versa. The key to this
particular index is that the managers arephysically replicating the index i.e. i it says its
in the index, the und managers make sure that
those actual physical shares are in the und. That
physical tracking is the norm in the US market
and is very common here in the UK.
The nthetc tracer aternate
But there is a newer alternative which involves
a novel twist, called the synthetic tracker.
6 EXCHANGE TRADED | How ETFs are Structured
...we mt
be to ttwoy bot
omet
lle te
t
eo...
nme Wet (%)
Apple 4.80%
Exxon Mobil 3.20%
Microsot 1.80%
International Business Machines 1.79%
Chevron Group 1.73%
General Electric 1.73%
AT&T 1.68%
Johnson & Johnson 1.46%
Procter & Gamble 1.43%
Wells Fargo & Co 1.43%
* As o 21/8/2012
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Ho doe a snthetc Tracer or?
All this talk o tracking error and less liquid
indices has spawned a rival to the physical
replicating index tracking und. This is called
the synthetic tracker und and in essence
there is just one crucial change.
A synthetic tracker und ollowing the FTSE
100, or instance, might do everything the
same as its peer which uses physical tracking
(or replication) but with the synthetic und,
its core holdings wont be the stocks inside
the actual index but what is essentially an
IOU. The issuer might be a large investment
bank that already holds all those stocks within
the S&P 500 as part o its normal trading
portolio. The banks trading desk simply
issues an IOU to the und which says that
theyll promise to pay out on the return rom
investing in the index. As collateral theyll
issue what is called a swap (a kind o
complicated IOU) which is that promise
(measured against the return rom the index)
as well as collateral to back up the promise or
contract. That collateral can come in many
dierent shapes and sizes and could be
whatever stock the bank holds within its
trading portolios at the time.
How does this IOU work? For arguments sake
lets imagine that our synthetic tracker is
ollowing the FTSE 100 over the next year. The
und starts with a market cap o 100m when
the FTSE 100 index is at 5,000. One year later
the index has gone up by 10% and the index
level is now 5,500. Our und should now be
valued at 110m.
Behind the scenes the value o the swap and the
associated collateral backing up this return has
simply increased rom a total o 100m
(probably comprising 90m in collateral and a
10m swap contract) to 110m (99m in
collateral and 11m swap contract). The beauty
o this synthetic tracking is that there need beno tracking error whatsoever and the issuer can
also underwrite to pay out the total net return
including dividends (once tax has been
accounted or). Costs might also be substantially
lower as a result and crucially, this synthetic
swap is very ecient in dealing with less liquid
markets such as Indian equities.
The downside o a synthetic tracker should be
immediately obvious. The investor is taking a
risk with that IOU. It is in essence a gamble on
the credit worthiness o the bank issuer, which
introduces the concept o counterparty risk.The bank will do its utmost to mitigate that risk
or you, by oering up that collateral. The
regulators will also probably orce the bank and
the issuer to limit that exposure to the swap
contract to 10% at most o the value o the und.
But there is no getting away rom the act you
are taking a risk. As an investor you need to
balance the potential reward o lower tracking
errors, access to new markets and lower expenses
with the downside o counterparty risk. The
debate between physical and synthetic tracking
has become very heated in recent years and
many investors have what can seem like an
irrational distrust o synthetic ETFs. There are
pluses and minuses or both orms o tracking
investors simply need to understand the risks
and make a considered judgement.
7How ETFs are Structured | EXCHANGE TRADED
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.
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8 EXCHANGE TRADED | How ETFs are Structured
yor chect or ng ET
i t ee te o t tt?
This is perhaps the most basic issue or many
private investors. Most o the index tracking
unds on oer are shares based unds that are
listed on an exchange, and thus the acronym
used to describe them starts with an E, as in
exchange. That means youve got to buy and
sell through a stockbroker, who can deal in
real time although there will also be a bid
oer spread between the asking and selling
price. Many investors dont have accounts
with stockbrokers but use an adviser whomight not even have access to a dealing
platorm. I this is the case theyll probably
use an index tracking unit trust und or OEIC
where the und is structured in almost exactly
the same way as an exchange traded und but
with dealing on a daily basis.
cotepty ow b poblem t?
Exchange traded notes and certicates have
an obvious risk they are in eect an IOU
by a large nancial institution, a orm o
securitised derivative. But that risk can alsobe overstated and can blind investors to the
advantages o using synthetic replication.
Investors also need to remember that all
listed products unds, notes and certicates
are not covered by the Financial Services
Compensation Scheme (FSCS). Invest in
any exchange traded und at your own risk
the government will not bail you out.
sto Le tvty ow m oe
o wo beet?
I you do invest in a physical tracker youllprobably be condent that your counterparty
risk is very low, as your und manager owns
that big basket o shares you are tracking. But
there is another risk that you need to be aware
o based around something called stock
lending. Those physical baskets o liquid
assets represent a real opportunity or a
sophisticated organization like iShares and
its parent Blackrock why not lend out the
share and bond certicates within its portolio
or limited periods o time to external
organizations who might to borrow them?
The borrowers are likely to be hedge unds
or bank trading desks who might have a
particular view on a company (bearish or
bullish) and want to make a quick prot by
speculating on stocks and bonds they dont
actually own. The borrower o stocks andbonds in an iShares ETF portolio will
obviously have to pay a ee or the duration o
the loan. Theyll also lodge collateral in
return which can amount to as much as 145%
o the value o the loan in some isolated cases
and more than 100% o the value o the loan
in nearly all other cases.
Stock lending is a perectly acceptable practice
many actively managed unds also engage in
securities lending nevertheless there is still
potential or concern with this stock lending.
What happens i the borrower o shares in theund goes bust? How easy will it be to grab
back and sell any collateral oered up by that
borrower? Yet its also important to note that
this stock lending is careully managed and
monitored you need to make your own
decision i you are happy with the procedures
and the collateral on oer.
how lq te ETF?
ETFs have become very popular in
Europe, with trading volumes exploding in
recent years. But that liquidity can also be acurse as markets stress or liquidity seizes up.
Markets-makers may choose to expand the bid
oer spread on lightly traded ETFs to
unacceptable levels these spikes in bid oer
spreads can also move around on an intra day
trading basis. These excessive bid oer spreads
also point to a bigger challenge exchange
traded products o all shapes and sizes may be
the big new thing in Europe but that listing
activity hasnt always translated through into
actual action on exchange many European
ETFs, or instance, boast low Average Daily
Volume (ADV) numbers.
it mpott to ote
tt t to le elly me
motoe yo ee to
me yo ow eo
yo e ppy wt
te poee te
olltel o oe.
Opinions expressed are those o David Stevenson, not
Alliance Trust Savings Limited. Please read the
important inormation at the end o this publication.
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rank Asst
1. iShares FTSE 100
2. ETFS Physical Gold
3. iShares S&P 500
4. ETFS FTSE 100 Super Short Strategy
5. iShares Markit iBoxx Corporate Bond Ex Financials
6. iShares Index Linked Gilts
7. iShares Markit iBoxx Euro Corporate Bond
8. iShares Markit iBoxx Corporate Bond
9. iShares Physical Gold
10. iShares treasury Bond 1-3
11. db X-trackers FTSE 100 Short Daily
12. iShares Dow Jones Emerging Markets Select Dividend
13. iShares $ Emerging Markets Bond
14. ETFS Physical Silver
15. iShares FTSE UK All Stocks Gilt
16. iShares FTSE 250
17. iShares FTSE UK Dividend Plus
18. db X-trackers MSCI AC Asia ex-Japan
19. SPDR Euro S&P $ Dividend Aristocrats
20. SPDR Euro S&P Dividend Aristocrats
9Top 20s | EXCHANGE TRADED
Te FTop 20
ExchangE
The table conrms the purchases o investors at that time; no reliance should be placed on the position
o any company in making any investment decisions. The rankings are based on the value o all
purchases made by Alliance Trust Savings customers in the Select SIPP, ISA and Investment Dealing
Account. Alliance Trust Savings does not provide advice. I there are any terms you are unamiliar with
or you are unsure o, you may wish to seek nancial advice.
ake a look at which Exchange Traded Funds Alliance Trust Savings customers bought
between 1 January 2012 and 31 October 2012.T
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EXCHANGE TRADED | HSBC Global Asset Management
t a broader level, emerging nations have undoubtedly
risen like a phoenix rom the ashes o their own disasters,
such as the Russian nancial crisis o 1998. Today,
emerging markets are the engine o global growth; while Western
economies stagnate, countries such as Brazil, Russia, India andChina (termed BRICs) continue to grow. At HSBC, we believe that
these economies are likely to be the driving orce o the new global
economy. In our opinion, they oer attractive investment
opportunities, or the ollowing reasons.
First o all, the BRIC economies have, to varying degrees, shown
rapid economic growth, increasing market size across all sectors.
They also have a burgeoning middle class, providing a rich source
o potential consumption. Each o the BRIC countries also has
multiple and dierent attributes and, thus, each is distinct.
Brazil, the th-largest country by area and population in the
world, has a wealth o mineral reserves and a ocus on energy
resources, commodities and agriculture.
Russia is the worlds largest country in terms o territory, with a
consumer market o over 140 million people, vast natural
resources, a highly educated workorce, and technologically
advanced research and production capabilities.
AT A TimE wHEN DEvElOpED
mARkET COuNTRiEs sEEm TO
bE OREvER EmbROilED iN
DEbT CRisEs, HiNDERED bylACklusTRE ECONOmiC DATA
AND bEsET by vOlATilE EquiTy
mARkETs, THE EmERGiNG
mARkET blOC CONTiNuEs
TO sHOw REmARkAblE
REsiliENCE. iN TRuTH, A NEw
wORlD ORDER sEEms NOw
TO bE ORmiNG, wiTH THE us,
ONCE THE uNDispuTED kiNG
O THE GlObAl ECONOmy,
sEEiNG iTs CROwN bEiNG
slOwly usuRpED by CHiNA.
gowt popet
met e tll t
A
Which MarkETs T
10
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11HSBC Global Asset Management | EXCHANGE TRADED
eme
India has the second-largest population in the world with
a young and vibrant workorce. The Indian economy benets
rom specialisation in services, outsourcing, technology and
pharmaceuticals.
China, with 20% o the worlds population, is the most
populous in the world and has raced up the GDP ladder in
the last decade. Indeed, China is one o the astest-growing
economies in the world with an annual growth rate in excess
o 10% over the last 30 years. In early 2011, it surpassed Japan
as the second largest economy and seems set to replace the USA
by as early as 2020. It is already the worlds largest exporter o
goods and is a leading global manuacturer across a wide range
o industries, acilitated by its abundant labour resources.
The our countries also complement each
other. China, as one o the leading
manuacturing countries in the world, depends
on the importation o commodities and energy
rom Brazil and Russia. Meanwhile, India
provides the IT services that make it possible to
optimise the use o new technology. The
continued requirement o commodities rom
Brazil and Russia will help boost the economies
o both countries. Meanwhile, India and China
have beneted rom the recent global economiccrisis, as they are net importers. Overall, these
actors make the BRIC bloc compelling rom
an investment standpoint.
At HSBC, we have a number o products that
aim to take advantage o these opportunities.
We have recently launched a renminbi xed
income und, which aims to allow investors
to gain exposure to the renminbi, Chinas
currency, and to benet rom its potential
appreciation via investment in the oshore
bond market.
We also believe that Russia is o particular
interest and, in July 2011, launched the rst
physically replicated Russian ETF in Europe.
ETFs are attractive as investments not only
because o their low costs, tax eciency and
stock-like eatures but also because they
provide investors with a way o tapping into less
accessible markets. HSBCs physically replicated
Russian ETF tracks the MSCI Russia Capped
Index, which represents the top 85% by market
capitalisation o listed companies in the Russian
investable equity universe. The tracking o this
index ensures the ETF is highly correlated with
the Russian market. Furthermore, the und has
so ar has delivered better tracking-error
dierence than most swap-based ETFs since its
launch date. By harnessing all o HSBCs
capabilities, we have been able to manage both
Russian equity and broader emerging market
ETFs on a physical and competitive basis that
are o high quality and good value.
Furthermore, BRIC countries have compelling long-term
growth potential. The sustained growth o BRIC economies
has been based on a combination o demographic actors,
increased industrialisation and a wealth o natural resources.
The pace o growth has seen their international signicance
increase rapidly, challenging the traditional economic
dominance o developed markets. Recent growth has been
driven by domestic rather than export demand, reducing
BRIC reliance on their developed markets trading partners.
The outlook or BRIC nations is also promising. Growth rates
in the BRIC countries are widely expected to exceed those o
western markets, especially China and India. Their stronger
outlook has been a key reason or the large investment
infows seen in recent years.
This article has been issued and approved by HSBC Global Asset Management.
The value o investments and any income rom them can go down as well as up and investors may not get back the amount
originally invested. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent
in some established markets. Stock market investments should be viewed as a medium to long term investment and should be held
or at least fve years. The article is or inormation only and does not constitute investment advice or a recommendation to any
reader to buy or sell investments. The views expressed were held at the time o preparation and are subject to change without notice.
FOcus On
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he process really is the same as prior to
purchasing any investment and the key is always
do your research. Why? As well as being aware
o the potential benets o any investment you have to be
ully aware o the risks and how much risk you wish to
take. Only by conducting thorough research can you
make an inormed decision, ully aware o the risks and
understand how much risk you are willing to take o both
the risks and benets o the underlying investment.
At Alliance Trust Savings we understand the value
o research in the investment decision process. We oer
all our customers ree access to research services rom
Morningstar, a recognised player in investment research
expertise and acilitation. You can access inormation
rom Morningstar on our website by clicking on the
Investment Selector tab at the top o our home page and
then ollow the instruction on that page which will take
you to the tool itsel, or alternatively it is available when
you login securely to your account.
In terms o ETFs and ETCs Morningstar holds a wealth
o inormation or you to consider.
By clicking on the ETF tab (see table 1), you are taken to
the main Morningstar page which contains a snapshot
o inormation. This page is your hub to access more
detailed inormation on the ETF/ETC o your choice.
The snapshot page is a good way o nding your eet
and allows you to search by category i youre interested
in a particular sector.
By using the drop down menus you can look at specic
ETF companies and their sectors such as Emerging
Markets or Commodities. Once you have selected a
company you can view a particular investment by
simply clicking on the investment name, which will
then provide access to more detailed inormation on
your chosen investment. You can also use the search
box and input the ETF name or Investment Symbol to
nd a specic investment. Once you have selected your
chosen investment you can view inormation via the
navigation on the let hand side (see table 2).
In the next section o this article we will look at how
you can purchase an ETF online with Alliance Trust
Savings. I you decide to purchase an ETF or ETC with
T
12 EXCHANGE TRADED |Alliance Trust Savings
yOu mAy bE CONsiDERiNG wHAT THE NEXT sTEps ARE bEORE
DECiDiNG wHETHER OR NOT TO bECOmE AN ET/ETC iNvEsTOR.
how to by ETF o ETc wt
aLLiancE TrusTsaVings
1. Ovevew Provides high level inormation
including Morningstar category, perormance history,
key stats, ISA eligibility and Inception Date.
2. ct Growth o 1,000 across dierent
time rames
3. Peome Perormance history tracked
against an index. Also gives annual, trailing and
quarterly returns
4. r t Morningstar risk rating
measured against category and return/risk analysis
5. Potolo Includes inormation on market cap,
prospective earnings, dividend yield actor, historical
earnings growth and asset allocation. ETFs/ETCs
invest in specic sectors and thereore asset allocation
will typically be 100% equities or example within a
specic region or 100% in a specic region.
6. Memet Contact inormation o the ETF/
ETC provider. Domicile, Legal structure, and whether
or not the investment is a UCITs is also covered in
this section.
7. Fee Includes any ees and expenses that you
will incur when buying into an ETF.
sde ar en ro tae 2 (oote)
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Morningstar ToolsMorningstar Fund ReportTM
db Physical Gold ETC XGLD
Performance History Key Stats
Benchmark
Growth of 1,000 (GBP)
962
Category: Commodities Precious Metals
Index:
Fund - - - - - 12.1 5.8
YTD 5.84 -
Fund +/-Idx
3 Years Annualized - -
5 Years Annualized - -
10 Years Annualized - -
12 Month Yield 0.00
Fund Benchmark
Morningstar Benchmark
London Fix Gold PM PR USD
-
Tax Year Return 15.78%
+/- Cat - - - - - 15.0 3.6
+/- Cat - - - - - - -
1,036
1,1101,184
1,258
1,332
1,406
31/10/2012
Trailing Returns 31/10/2012
Overview
Chart
Performance
Risk and Rating
Portfolio
Management
Fees
Glossary ?
Investment Information
2008 2009 2010 2011 2012
Morningstar Category Morningstar RatingTM
Commodities Precious Not RatedMetals
IMA Sector ISIN- GB00B5840F36
ISA Exchange NameNo LONDON STOCK
EXCHANGE, THE
NAV 30/10/2012 Day ChangeUSD 169.81 0.64%
Total Net Assets (mil) Total Expense Ration- -
Annual Management Inception DateFee 15/06/20100.29%
Screens or illustration purposes only. Source: Morningstar
Alliance Trust Savings you will be asked to
conrm that you have read the relevant Key
Investor Inormation Document (KIID) beore
completing the purchase. The KIID is really
useul and provides important inormation. The
good news is that you can access KIIDs againthrough the Documents tab o Morningstar.
The inormation contained within the KIID is
required by law to help you understand the
nature and the risks o investing in the ETF/
ETC. A KIID will only be provided where the
investment is classied as a UCITs.
There is much more inormation available and
too much to cover here Why not log into
your account today and nd out more?
Ho to rchae an ET/ETC th
Aance trt sangOnce you have completed your investment
research and decided on which ETF/ETC to
purchase the easiest way to complete your
purchase is online using our secure trading
platorm. To purchase an ETF or ETC ater
logging in click on the Trading Centre tab
and then click trade now. It is important to
note that you cannot purchase an ETF/ETC
within the und supermarket. I you have
ever purchased an equity with Alliance Trust
Savings online the process is exactly thesame or ETFs/ETCs.
To help you we have produced a list o all
the ETFs/ETCs available on the Alliance
Trust Savings platorm and importantly the
Investment Symbol that applies as you will
need this or any purchases or sells. This
ull list is available within the orms and
documents section o our website under
Formal Documents. This list will also help
you with your Morningstar Research as
some investments displayed on Morningstar
are not available on our platorm.
We hope you have ound this short guide to
ETF/ETC research helpul. Our website has a
range o how to videos one o which is about
purchasing an ETF or ETC online why not
check it out? Happy investing.
The value o investments
and the income rom them
may go down as well as
up and you may not get
back the original amount
you invested.
I you are unsure whether an
investment is right or you,
or you are unamiliar with
the terminology, you should
seek proessional advice.
Past perormance is not a
guide to uture perormance.
Garry joined Alliance Trust
Savings in October 2010.
His role is to manage the
Alliance Trust Savings product
and marketing strategy.
Contact:
For more inormation, please
visit our website
alliancetrustsavings.co.uk
Garry Mcluckiemaretng Drector
Alliance Trust Savings
13Alliance Trust Savings | EXCHANGE TRADED
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PowerShares Dynamic US Market Fund US Large-Cap Blend Eq... 10.93 0.75 568.13 GBX
PowerSharesEQQQ Fund GBP US Large-Cap Growth E... 11.28 0.30 4,036.00 GBX
PowerShares FTSE RAFI AsiaPac x-Jpn Fund G... Asia-Pacific ex-Japan E... Not Rated 12.92 0.80 468.15 GBX
PowerShares FTSE RAFI Dev 1000 Fund GBP Global Large-Cap Value... 5.00 0.50 743.13 GBX
PowerShares FTSE RAFI Dev Eur Mid-Sm GBP Europe Mid-Cap Equity 10.79 0.50 715.00 GBX
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PowerShares FTSE RAFI US 1000 Fund GBP US Large-Cap Value Eq... 7.03 0.39 631.88 GBX
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7/30/2019 Exchange Traded Funds - Alliance Trust Savings
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DAviD sTEvENsON CHAiRs A
DisCussiON AbOuT EXCHANGE
TRADED uNDs wiTH A pANEl O
EXpERTs: NiCk blAkE, JOsE GARCiA-
ZARATE AND mANOOJ misTRy.
Dad: wh od ordnarnetor net n ndex-tracngnd? wh od the not go oand net n netent trt or atandard nt trt?
Joe: I think one o the key things about the
philosophy behind passive investment, is
acknowledging the inability o active managers
to comply with their objectives. There are a loto studies that show over the long term, that
active managers are unlikely to ull their
investment objectives.
14 EXCHANGE TRADED | Round Table
rOundTaBLE
This round table event was lmed at the Tate Modern,
London on 5 September 2012. To view the ull discussion
visit alliancetrustsavings.co.uk
7/30/2019 Exchange Traded Funds - Alliance Trust Savings
15/28
This is not a question o actually saying that the
active managers are not good at what they do, or
that the rationale behind picking a certain stock
or a certain bond is not correct at the time, its
basically measuring the perormance over a long
term period which is what investors should be
interested in.
Dad: what hod netor reaoc on?
Mooj: When you look at an ETF it is
essentially the index-tracking und listed on an
exchange and it trades like any other listed
security so in the same way as with an
investment trust you buy it on the exchange
through your broker you can do the same withan exchange traded und. From a regulatory
perspective ETFs are regulated as any other
OEIC or unit trust, they conorm to whats
called the UCITS Regulations a pan-European
set o regulations that govern unds across
Europe and youve also got the other ETPs
Exchange Traded Products categories out there
so youve got Exchange Traded Commodities
which are known as ETCs and typically these
will give you exposure to single commodities or
a basket o gold or oil or example and then you
also have other products called ExchangeTraded Notes and these tend to be linked, once
again could be linked to commodities but could
also be linked to strategies such as volatility.
I you look at it rom a regulatory perspective
an ETF is the most highly regulated product,
an ETC is basically issued by a special purpose
vehicle and it trades like a security on the
exchange and an Exchange Traded Note is
typically a debt security issued by a bank.
Dad: One o the ot hocngthng that the aerage ee charged aerage nd n brtan actagong not don oer the at eear and that acro the entrenere o nd, t ho do ET ornt trt coare n ter o cot?
n: Thats the challenge or investors, its
knowing in advance who will beat the indexand thats the real challenge. Now, as to the
dierent types, certainly in our view an
Exchange Traded Fund, an index exchange-
traded und and a mutual und is actually the
same vehicle, its just a dierent way to buy
the same exposure in that way, typically
investors would nd that an index und or an
ETF would typically be much lower cost than
an active und and thats because active unds
put a lot o eort into research trying to
outthink the market, trying to do the deep
research to understand how they mightout-perorm the market, an index und isnt
trying to beat the market, it just buys or
example everything in the FTSE 100.
15Round Table | EXCHANGE TRADED
Nick Blake is Head o Retail. He is responsible or overseeing development o
Vanguards und range or the UK and European businesses and the distribution
to our key retail audiences o Financial Planners, Wealth Managers and Asset
Management Companies. Nick joined Vanguard in 2009 ater a long career with
a leading UK Lie Oce where he held senior positions in distribution, and morelatterly as a key member o the team delivering a successul Wrap platorm.
Jose Garcia-Zarate is a senior ETF analyst or Morningstar, covering European ETFs.
Beore joining Morningstar in 2010, Jose spent seven years as a senior European
sovereign bond market strategist or 4cast, a London-based consulting rm. Prior to
4cast, he was a macroeconomic analyst and Eurozone sovereign bond markets analyst
or S&P MMS. Jose began his career as an analyst intern or Spains Economic Ministry,
working in the external trade department in the ministrys USA oce.
Manooj Mistry is UK head o db X-trackers, Deutsche Banks exchange traded
unds (ETF) platorm. Manooj joined Deutsche Bank in 2006 having previouslyworked at Merrill Lynch International, where he was responsible or the
development o LDRS ETFs, the rst ETFs to be launched in Europe. Manooj
graduated in economics and business nance rom Brunel University.
Nick BlakeHead o Reta,Vanguard
Jose Garcia-Zaratesenor ET Anat, Morningstar
Manooj Mistryuk Head o d X-tracer, Deutsche Bank
Te lleeo veto
owwo wll bette e.
Nick Blake
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Dad: Ho ch odan aerage ndex-tracng
one charge?n: The usual sort o apples and apples
comparison trouble here is that some o
the active unds include commissions
and ees in them whereas many index
unds dont pay commission and ees
but on a like or like basis an index und
would typically be hal a percent to
three quarters o a percent cheaper than
an active und in general and as you say
the compound eect o those charges
could be quite signicant.
Joe: We ran a study at Morningstar
about the implications o high
management ees and it is astonishing
how much o your long term returns
can be eaten away by paying
management ees. At 1% or 2% this
doesnt sound like a lot, but this is
compounding year ater year.
Mooj: Its very much like what we see
is that ETFs give retail investors the same
tools as institution investors have,
institution investors have been using
passive products or many years.
Dad: becae a ot o eoehae enon nd, odenon nd ae e ondex tracng?
Joe: They do because this is one o the
key industries where you really need to
make sure that the stream o revenue is
more or less secure and it is one o the
key reasons why I think the ETF marketis actually kicking o with some
important growth rates in places like
the UK where you have a very
important pension und industry.
Dad: what are the nd othng that eoe are ngot there at the oent?
Joe: Well lately its been about a search
or yields and trying to nd the saest
investments. So, you have the xed
income space gathering a lot o
investors interest, and you have a
commodity space o the ETFs.
Gold is purely a sae haven strategy borne
out o the uncertainty in the global
economic picture and people are lookingto protect capital. Its not so much that
theyre seeking to have positive returns
but at least preserve the capital and on
the xed income space you see a lot o
interest in corporate bonds
Mooj: The reason why you can oer a
single commodity exposure to something
like gold is that the vehicles that the
products are issued by are vehicles that
arent as regulated as unds, they are
regulated as special purpose vehicles
which have the opportunity to issue debtor securities linked to one asset so theyre
not subject to the same diversication
rules you have in unds.
Dad: so there a tte trer n ther trctre.
Mooj: Yes but a lot o these products
or example the gold products are called a
whole physical gold, tobacco products.
Dad: it ght e aer noe reect.
Mooj: What you typically see with an
exchange traded commodity is that gold
is held in a vault somewhere backing that
investment so these products are backed
by the actual gold bars sitting somewhere
so these products are what I would call
collateralised or asset backed theyre
physically backed by assets.
dv: And thats a crucial thing
because when we talk about
commodities in act you sort o have to
go down that route dont you because
quite oten theyre either physical
holdings or theyre utures or theyre
done on options exchanges so they cant
be held in the traditional way that an
equity und would hold, you just cant
do it that way can you so thats the
reason theyve done it that way.
Dad: what the g derencen th hca er nthetc
deate, hat gong on there?it doe ond er conngor an o .
16 EXCHANGE TRADED | Round Table
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...t
toow mo yo lotem et be etewy by memet
ee ye teye...
Joe: I think the rst thing is to dene is what is
a physical and what is a synthetic und. Physical
is pretty easy to understand. The und is eithergoing to hold all the components o the index or
a subset o the components o the index.
Synthetic providers or synthetic ETFs deliver the
return o the indices via small contracts.
The key dierence obviously in the structure is
that a synthetic ETF will always have a counter
party risk, thats the nature o the structure
because a counterparty, typically that is when an
investment bank will have to provide the return
o the index and there is always the risk even
though theoretical that the bank will not be
able, or whatever reason, to provide that return.
Dad: manooj o do nthetco jt ta throgh ho otrctre a nthetc nd.
Mooj:Jose has explained the rst part in terms
o how the und works, the und is entering into a
contract with a bank to deliver the underlying
index perormance then as part o that contract
the und also needs to receive some physical assets
so this physical collateral is there to basically oset
the counter party exposure. The amount o assetsthat need to be delivered or posted with the und
is determined by the regulations, by the UCITS
Regulations I mentioned earlier so as a minimum
a und must at least have 90% assets.
In many cases in the ETF industry many
providers are actually doing what is called over
collateralisation so theyre actually assets greater
than the value o the und so these are basically
an element o a cushion o security there.
Dad: To the otde oererho ed to tradtona ndtrctrng, hat are theadantage o dong t th a?
Mooj: The advantages o synthetic
replication or swap based replication is that youcan deliver the index perormance without any
tracking error / dierence. This means that you
can guarantee that your returns will be the FTSE
100 index minus the management ees.
Dad: And to ndertand thetracng error, t er an deahch that o a ore gong totrac the TsE 100 and t trn n10% one ear and o on trn n9%, or tracng error e 1%.
Mooj: 1% yes and some o that 1% willobviously be the management ee but there could
be additional tracking error on top o that.
17Round Table | EXCHANGE TRADED
Jose Garcia-Zarate
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Dad: so Nc o do a hcaaroach and that ort o doe hatt a on the ct tn rea o the TsE 100, o thench o toc n the TsE 100,hat are the adantage o that
aroach do o thn?n: Both methodologies (Synthetic and
Physical) achieve the same outcome or
investors and both are covered by the European
UCITS Rules. Our preerred approach is
physical, we like to own the securities and
deposits that are there backing up the return or
investors. One o the challenges with physical
is, as the unds get broader, so lets say youre
trying to track a more global index.
Dad: yo hear thng e themsCi word.
n: Correct, and that might require you to
own thousands o stock.
And there could be a point o ineciency
where trying to own a very small amount o a
very obscure opportunity means its
inecient or the und manager to own that
so whilst most physical managers will get as
close as they can to the index and a really
good one will do very well there you could
start to see small amounts o tracking error
occur so really the trade-o or investors hereis with synthetic you get a certainty o return
because you have the promised return but
have counter party risk versus no counter
party risk with physical but potentially a
slight tracking error and a good adviser and
good investors really look or weighing o
those trades around counter party risk versus
perect tracking.
Mooj: You can get counter party risk with
the physical replication to a certain extent
Dad: Ho doe that or? ieheard thng e toc endng, hatgong on there? what that a aot?
Joe: There could be counterparty risk in
physical unds.
Dad: Ho doe that or, re Nc ha h 100 toc, h TsE100 he got the n h ae andhe ha the certcate, hat
rong th that then, hat codgo rong there?
Joe: The thing that could go wrong is that i
he decides to actually lend those 100 securities
to other parties then obviously you create an
element o counterparty risk in the sense that
those other parties might not return the
securities to the und. Not all physical unds
engage in securities lendings but a lot do.
Dad: what an nteretng area
ot there that netor hod jtee an ee on, here there a oto actt gong on?
Mooj: I think what were seeing is that with
ETFs retail investors have the same tools as
18 EXCHANGE TRADED | Round Table
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institutional investors have and what weve
already seen is a number o institutional
portolio managers using products like ETFs and
index unds in their portolios and theyre
using these products to do asset allocation so
rather than choosing individual stocks or
bonds, theyre actually deciding OK I want
exposure to a particular market or asset class.
n: The thing Im most pleased with actually
is not so much in the strategies themselves but
more in the access that investors have to these
strategies so there was a time when low cost
products wouldnt be carried by many o the
platorms out there because quite rankly they
didnt pay a commission being very low cost so
investors really only had the choice o some
relatively expensive unds and things like
investment trusts or ETFs or no load mutual
unds typically wouldnt be carried but one o
the developments Im delighted to see more
orward thinking platorms like Alliance Trust
are making the access to these vehicles ar
wider now than has ever been beore so
investors have got ar more choice and theyve
also got choice in how they index so in many
ways an ETF is just another way to index like a
mutual und but how they index can also have
an impact on cost as well, accessing these
through a stock broking platorm might be a
cheaper way to go than accessing them
through a traditional unds platorm and
investors should think about not just the cost
o the und itsel but also the cost o ownership
o the und just as much because both o those
costs will erode their returns over time so one
o the things Im delighted to see is just the
broader access to these vehicles, better
disclosure, more transparency just so that
investors have a ar more inormed way o
looking at their portolios.
Joe: Perhaps it is the pending revolution or
the ETF market, the accessibility and the
extensive use o Exchange Traded Products bythe retail community. I think that socially the
conditions are right or an increased
participation o the retail community because
people have to save money or things such as
pensions and university costs.
19Round Table | EXCHANGE TRADED
This article is or inormation only. The views stated in the discussion are those o
the panel members at the time, and not Alliance Trust Savings Limited. Please read
the important inormation at the end o this publication.
Investments can down as well as up and capital is at risk so that investors may
get back less than they originally invested.
Investments in emerging markets may involve a higher element o risk due to less
well-regulated markets and political and economic stability. Exchange rate changes
may cause the value o underlying overseas investments to go down as well as up.
Whilst care has been taken in compiling the transcript o the discussion, no
representation or warranty, express or implied, is made by Alliance Trust Savings
Limited as to its accuracy or completeness.Nothing contained in this transcript o the discussion should be construed as
being an invitation or inducement to engage in investment activity. No advice is
given by Alliance Trust Savings Limited. For advice on investing, please consult an
independent fnancial adviser.
...vetove ot
moe oe, lo ow teye...
Nick Blake
7/30/2019 Exchange Traded Funds - Alliance Trust Savings
20/28
iNvEsTORs CAN usE ETs TO builD ACTivEly mANAGED pORTOliOs,
OR iNvEsT iN A siNGlE ET wHERE AN iNDEpENDENT AssET mANAGER
DOEs THE ACTivE AllOCATiON OR yOu, sAys mANOOJ misTRy, uk
HEAD O Db X-TRACkERs, DEuTsCHE bANks ET DivisiON.
using ETF
he traditional premise or investing in
an ETF is to track the perormance o a
market at low cost via a tightly
regulated and liquid trading instrument. As
index trackers, ETFs are explicitly designed not
to provide returns above those provided by the
index. Rather, they are simply designed to be an
ecient mechanism or delivering
to the investor the indexs risk and reward.
In investment circles, acquiring exposure to the
whole market in this way is reerred to as takingbeta exposure. Many long-term, buy-and-hold
investors are happy to maintain beta exposure
at low cost through investing in ETFs. Other
investors, however, aim not just to track market
perormance but to generate returns beyond
that o the market. This type o above-market
perormance is known as alpha.
ETFs can also be used to pursue alpha. However,
unlike traditional pursuers o above market
returns, who engage in stock and bond picking,
alpha generation using ETFs is all about asset
allocation being in the right market at theright time, as opposed to being long the right
underlying security.
Focusing on asset allocation as the main driver
o investment perormance as opposed to
company stock or bond selection constitutes a
modern alternative to the traditional asset
management approach. There is compelling
evidence to suggest this could be a good way to
generate alpha. Some academic research
suggests that the majority o the variance in
investor returns is determined by the overall
choice o asset class invested in, rather than theindividual choice o stocks or bonds. This may
help explain why most active managers do not
outperorm markets consistently over time.
db X-trackers, Deutsche Banks ETF platorm, is
the second largest ETF provider in Europe by
assets under management. With over 200 ETFs
to choose rom, covering all major asset classes,
investors can use db X-trackers ETFs to put
together their own asset allocation portolios.
As a basic example, an investor seeking a
globally diversied and asset class diversied
portolio, but with an allocation biased towardsemerging markets, could combine long
positions in db X-trackers ETFs on the FTSE
T
dym et lloto
20 EXCHANGE TRADED | Deutsche Bank db X-trackers
7/30/2019 Exchange Traded Funds - Alliance Trust Savings
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All-World Ex UK, the iBoxx Gilts Total
Return Index, the DBLCI OY Balanced ETF
(GBP) which provides broad commodity
market exposure and the MSCI Emerging
Markets TRN Index ETF, with a heavy
weighting towards the latter. (Note that this is
a hypothetical example only. Investors should
seek proessional advice beore trading.)
For investors who do not wish to actively
manage their own portolios, but like the idea
o potential alpha generation through active
asset allocation with ETFs, there is another
alternative. In February, db X-trackers
launched an actively managed ETF that uses
asset manager SCM Private to allocate an
underlying portolio o exchange-traded
products. The db X-trackers SCM Multi Asset
ETF invests in a portolio o ETFs and
exchange-traded commodities (ETCs) with the
goal o using asset allocation to accumulate
returns signicantly ahead o infation. Key
attributes o the ETF are:
Mlt aet the und invests in a widerange o Deutsche Bank ETFs and ETCs to
gain signicant diversication and liquidity
at low cost.
atvely me the weightings/asset
allocations are actively managed on at least
a monthly basis by SCM Private and may be
all equity, all bonds or all cash.
ivetmet e the und will invest
solely in indices in order to produce more
diversication and less volatility.
scM me wt povet eo ove my ye chie
investment ocer Alan Miller has an
exceptional record as a successul und
manager with over 22 years experience in
many dierent investment vehicles ranging
rom pension unds, investment trusts, unit
trusts and hedge unds.
Low ot the db x-trackers SCM Multi-Asset
ETF has an all-in ee o 0.89% pa. This
compares avourably with an average total
expense ratio (TER) (annual operating costs
including underlying und costs) or aund-o-unds investing into externally
managed equity unds o around 2.47%*.
Tpet the ull portolio including
all underlying holdings is published daily
on the internet.
By being highly diversied through being
exposed to a range o ETFs and ETCs, which
themselves track the perormance o a large
number o constituent securities the db
X-trackers multi-asset ETF aims to deliver
stability in total returns while managing
volatility. The product combines the positive
elements o ETFs, such as being relatively
low cost and transparent, with active
management perormance. It is a straight
orward and modern alternative to traditional
discretionary unds.
prodct inoraton
iveto ol ote tt b x-te
ETF e ot ptl potete o tee
veto e b x-te ETF
ol be pepe ble to t
loe o te ptl vete p to totl
lo. The value o an investment in a db
X-trackers ETF may go down as well as up and
past perormance is not a reliable indicator o
uture perormance. Please consult your
nancial advisor beore you invest in a db
X-trackers ETF since not all db X-trackers ETFs
are suitable or all investors. A comprehensive
list o risk actors is provided on www.et.
db.com. For urther inormation regarding risk
actors o a specic instrument, please reer to
the risk actors section o the prospectus, or
the Key Investor Inormation Document.
Manooj Mistry, UK head
o db X-trackers: Manooj
Mistry is UK head o db
X-trackers, Deutsche Banks
exchange traded unds (ETF)
platorm. Manooj joined
Deutsche Bank in 2006
having previously worked at
Merrill Lynch International,
where he was responsible orthe development o LDRS
ETFs, the rst ETFs to be
launched in Europe. Manooj
graduated in economics
and business nance rom
Brunel University.
Manooj Mistryuk Head o d X-tracer
Deutsche Bank
21Deutsche Bank db X-trackers | EXCHANGE TRADED
b -te scM Mlt aet ETF
All-in Fee/TER 0.89%
Trading Currency GBP
Exchange Code XS7M
ISIN IE00B6TTP151
UCITS IV Complaint Yes
ISA/SIPP Eligible Yes
* Source: Lipper, Investment Lie & Pensions Moneyacts, July 2011.
This article has been issued and approved by
Deutsche Bank db X-trackers.
7/30/2019 Exchange Traded Funds - Alliance Trust Savings
22/28
22 EXCHANGE TRADED | Invesco PowerShares
mANy iNvEsTORs HAvE ARGuAbly bEEN DisillusiONED by
THE AppARENTly DismAl pERORmANCE O sTOCk mARkETs
GlObAlly OvER THE pAsT DECADE, HOwEvER, sCRATCHiNG
THE suRACE sHOws THAT THERE wERE mANy sTOCks THAT
HAvE DONE AiRly wEll, AND iNDiCEs THAT HAvE AvOiDED
sHARp Alls AND iN ACT, HAvE ACTuAlly pOsTED GAiNs.
ThE POWEr OF F
he FTSE 100 Index is constructed byinitially ranking all UK listed securities
by their market capitalisation, arrived
at by multiplying the number o shares in issue
by the current market share price. The largest
100 stocks rom this ormula make up the FTSE
100 Index we see in the nancial pages o the
national newspapers.
Since the launch in the United States o the
S&P 500 Index as the rst market capitalisation
weighted index in 1957, the global investment
community has embraced market-cap
weighting as the methodology underlying themajority o modern market indices. Quite
literally, market-cap weighting is the popular
choice and has been broadly accepted as the
standard way to measure equity markets.
Market-cap weighted indexing means the market
dictates the selection o and the weighting that a
stock receives in an index. This is problematic
because market speculation can cause signicant
mispricing o stocks which, in turn, can result in
what we believe to be disproportionate
weightings in that index. A good example o this
phenomenon occurred during the 1999-2000
tech bubble, when we saw internet company
share prices surge as a result o the uture
perceived growth these companies were expected
to generate in this new tech-savvy era.
As the share price o some o these companies
took on an almost vertical trajectory, traditional
indices based on market-cap ound their
weightings in such stocks were becoming larger
and larger keeping in mind that these indices
are derived rom the market capitalisation o a
company, which is linked to the share price.I the share price increases and in turn its
market capitalisation, then its weight within
an index increases too.
Market-cap weighted indices do not usuallyprovide an accurate representation o the state o
an economy, but they do mirror the volatility o
stock prices. The market price o a stock can be
signicantly infated by the perceived uture
growth prospects o the underlying company
which, as we saw during this tech-bubble, can be
overly optimistic, incorporate unknowns and
thereore be prone to inaccuracies. As a result,
the underlying economic size and strength o a
company cannot be determined with any real
accuracy by reerence to its position in a market
cap-weighted index due to possible market
speculation and mispricing.
A arter a to acce the aret
Fundamentally weighted indices could be
viewed as being essentially a modernisation o
cap-weighted indices. These indices use a
undamentals-weighted approach designed to
assign index weights according to the nancial
considerations o a company, not its market
capitalisation. Fundamental indexation relies on
portolio weights that are derived rom
company undamentals (cash fow, book value,sales and dividends), rather than portolio
weights derived rom the market valuation o
shares in issue. We believe that these indices
provide the opportunity to more accurately
determine those assets with higher returns and
lower risk proles when compared to traditional
cap-weighted indices or benchmarks.
Some indices are constructed using only a
single measure. At Invesco PowerShares, we
believe in a balanced approach and look or
those indices which incorporate a range o
corporate undamentals and thereore provide amore balanced picture o the nancial quality
and economic opportunity o a particular
constituent company.
Issued and distributed in
the UK, on behal o Invesco
PowerShares, by Invesco
Asset Management Limited.
Registered Address: 30
Finsbury Square, LondonEC2A 1AG. Authorised and
regulated by the Financial
Services Authority.
Ravinder Azad has over 13
years experience in asset
management, o which almost
eight have been spent in
Listed Fund Sales. He has been
instrumental in the launch
and on-going promotion
o the Invesco PowerShares
UK Exchange Traded Fundsbusiness. Ravinder passed
the IMC in 2000 and is a
member o the CFA Society.
Ravinder Azadlted nd sae Execte
Invesco AssetManagement Limited
T
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Invesco PowerShares | EXCHANGE TRADED
undaMEnTaLsndaenta eare canetter refect a coaneconoc contrton
In contrast to market-cap weighted indices,
which mirror the volatility o stock prices,
undamental indices assign weights according to
a companys operating and accounting
perormance, helping to ensure whats believed to
be a more accurate representation o its internal
economy in relation to its place in the index.
Fundamental indices do not allow the market
to directly dictate the weight a stock receives in
an index so they are less likely to refect stock
market bubbles. This is because a constituent
companys revenues and dividends are not
directly aected by share price speculation.
ndaenta eghted ndce
Aredesignedtoidentifythefairvalueof
each company.
Utilisefundamentalvariablesthatdonot
depend on the fuctuations o market valuation.
Performancemaybelessinuencedbystock
market bubbles as index member weights are
not driven by share price volatility
Ordinarilyavoidoverweightingovervalued
stocks a potential shortcoming with market
capitalisation-weighted indices.
more ecent ndexng o annecent aret
Cap-weightinghasarichhistory,buthasdenite shortcomings.
Fundamentalindexingseekstoaddressthese
short comings while maintaining the benets
o a broad market index.
It is thereore essential to understand the
construction methodology behind the index that
is being replicated by an Exchange Traded Fund.
iortant noraton
The price o ETFs and any income will fuctuate,this may partly be the result o exchange rate
fuctuations, and investors may not get back
the ull amount invested.
Past perormance is not a guide to
uture returns.
When making an investment in an ETF,
you are buying shares in a company that
is listed on a stock exchange. Investments
cannot be made directly into an index.
ETFs share prices are subject to a bid/oer
spread, subject to management ees, and
whilst they seek to track an index, there is
no guarantee that this will be achieved.
Accordingly, ETF investment returns will
be dierent to those o the index.
rette veto: the inormation in
this document is designed solely or use in
the UK, and complies with regulatory
requirements o this jurisdiction only, and
is not intended or residents o any other
countries. The distribution and the oering
o ETFs in certain jurisdictions may be
restricted by law. Persons into whose
possession this document may come are
required to inorm themselves about and to
comply with any relevant restrictions. This
does not constitute an oer or solicitation
by anyone in any jurisdiction in which such
an oer is not authorised or to any person
to who it is unlawul to make such an oer
or solicitation.
Persons interested in acquiring ETFs
should inorm themselves as to (i) the legal
requirements in the countries o their
nationality, residence, ordinary residence
or domicile: (ii) any oreign exchange
controls: and (iii) tax consequences which
might be relevant.
This document is intended or inormation
purposes in regard to the existence and
potential benets o investing in ETFs.
However, it is not intended to provide
specic investment advice including,
without limitation, investment, nancial,
legal, accounting or tax advice, or to make
any recommendations about the suitability
o the ETF or the circumstances o any
particular investor. You should take
appropriate advice as to any securities,
taxation or other legislation aecting youprior to investment.
23
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THE ET REvOluTiON is NOw TRuly GlObAl iN AlmOsT
EvERy pART O THE DEvElOpED wORlD NEw ET pROviDERsARE spRiNGiNG up AND ETs ARE EvEN THREATENiNG TO
iNvADE THE DEvElOpiNG wORlD wiTH NEw lAuNCHEs iN
plACEs As vARiED As bOTswANA AND TAiwAN.
EXCHANGE TRADED | The ETF Boom!
Te ETF
BOOM!
auging just how successul this
indexing revolution has become is airlystraightorward, as many o the leading
issuers o ETFs such as iShares (now owned by
giant US asset management rm Blackrock) and
Deutsche Bank (through their DB X trackers unit)
closely monitor the market, attempting to spot
key trends and generally keeping a watchul eye
on liquidity on exchange.
At the end o June 2011 or instance analysts at
Deutsche estimated that the global index
tracking industry had reached assets under
management o $1.4 trillion globally, with 22%
(216.4 billion) concentrated in European listedunds. The Deutsche analysts also reckon
that looking at the most recent ten year
period, over the past decade, the European
ETF industry grew [measuring assets] by
thirteen old (13.2x), while the US ETFmarket grew over six-old (6.5x).
These numbers represent extraordinary
growth over the last decade ETFs were
virtually non-existent in Europe at the
beginning o this new century and even in
the US they were a tiny niche. Now ETFs
are arguably the astest growing part o the
whole global asset management business.
By the end o December 2011 the Deutsche
Bank analysts reckoned that there were over
3,210 exchange traded products (unds and
notes) o some sort globally o that total o
3,210 products, 2,823 were ETFs and 387
either ETCs or ETNs.
G
24
By David Stevenson, Investment Columnist, Financial Times
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whch aet cae are oarth ET?
The table below rom Blackrock gives us some
idea o the key markets avoured by equity
investors. Unsurprisingly equities o all shapes
and sizes dominate the market although in
fows into xed income securities (bonds) as
well as commodity unds has increased
markedly over the last ew years.
Wt o ee te vet ?
now invest globally, in both conventional and
infation linked bonds, with issuers as diverse
as low risk governments through to very highrisk sub investment grade corporate.
Crucially the income yields on oer vary
hugely with low risk short dated government
bonds paying as low as 1% (or even lower)
through to high yield corporate bond unds
paying out not ar o 10%. Total expense
ratios are also very low on these bond trackers,
with no unds charging more than 0.50% and
more than a ew less than 0.20% pa.
But investors also need to think careully
about investing in bond ETFs especially withrisky issuers such as emerging markets
governments and big corporates. Bond indices
are deliberately weighted in their composition
towards the largest bond issuers not the most
reliable, credit worthy issuers. This means that
an index in junk corporate bonds or instance
is likely to have its heaviest weighting in the
most traded, most liquid bonds which are
likely to be issued by the most indebted
companies. Might it not be better to invest in
those issuers with the lowest risk levels and
highest credit ratings as opposed to the most
popular bonds?
commoty ETF
Small, specialist index tracking und specialists
such as ETF Securities have prospered hugely
in recent years, helped along by a massive
increase in unds allocated to commodity
unds generally and precious metals in
particular. To this day even though gold prices
have stalled, big gold unds run by the likes o
ETF Securities continue to experience massive
infows o as much as $1 billion every month.
Investors worried by central bank interventionin the money markets are betting that
eventually infation will rear its ugly head,
with largely uncontrollable results, sparking a
massive increase in gold prices. These ears
have pushed investors to pump money into
ETCs that invest in what is called physical
allocated gold. These trackers allow an
investor to buy an allocated share o actual
physical gold held in large, secure gold vaults
in London, New York and Switzerland. Charges
are usually airly low (well under 0.50% or the
main unds) and most investors are re-assuredby the act that they own gold assets directly
under the control o the und managers, not a
large investment bank.
25The ETF Boom! | EXCHANGE TRADED
Data as at end o November 2011 or where updated data is not
available, we utilise the most recent period available.
Source: BlackRock Investment Institute, Bloomberg
The bg Ne Trend n ET land
This analysis by BlackRock is enormously
revealing. It shows that ETFs have become
both popular and also diverse. Gone are the
days when investors simply used ETFs to access
a large and important stock market
index such as the FTSE 100 or the S&P 500.
This data suggests that in recent years investors
have primarily been using ETFs as the building
blocks or very diversied portolios ull o
innovative strategies and markets.
Bo ETF
Investing in bonds has become popular with
ETF investors in recent years. Bonds have
had a good decade compared to equities in
terms o returns, so a big infow o unds into
bond ETFs shouldnt be terrically surprising.
But that insatiable demand has sparked a
huge increase in the variety o bond ETFs
available to the private investor - you can
Epoe t nov 2011
us Bllo auM
Met
e %
YTd e ete m-
emet %
Equity 1,067 69 0.4
North America 556 36 4.6
EmergingMarkets 204 13 -14.3
Europe 114 7 -5.8
Asia Pacic 79 5 -3.8
Global exc US 66 4 3.2
Global equity 48 3 89
Fixed Income 251 16 21.1
Commodities 196 13 5.7
Alternative 4 0 -1.2
Currency 8 1 27.8
Mt t ot
be bette tovet toee wt
te lowet level
et ett
oppoe to temot popl
bo?
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At the moment investor interest in more
mainstream commodity ETCs has diminished,
especially as Chinese growth slows down andindustrial metal prices wane, although its also
true that agricultural spot prices have shot up
recently ollowing the recent poor US grains
harvest. But investor interest in commodities is
bound to wax and wane over the course o the
business cycle and talk o a global economic
recovery will probably result in yet another surge
o interest in commodity tracking unds - these
ETCs invest in utures contracts or all manner
o individual commodities ranging rom a broad
group o energy markets (including oil) through
to individual trackers or copper or grains.
Eme Met ETF
Many investors have woken up to the potential
or solid, long term prots rom investing in
emerging and rontier markets. There are many,
excellent emerging markets managers already
operating in the investment trust sector or
instance including Hugh Young at Aberdeen,
Slim Feriani at Advance and Mark Mobius at
Templeton, but the choice o unds is much
bigger within the ETF universe and the costs are
much lower. Fund managers such as HSBC have
made a point o specialising in these emerging
markets, oering ETFs with lots and lots o
choice and very low ee structures (the vast
majority o HSBCs product range charges less
than 0.50% per annum) and also boast simple
to understand physical tracking structures.
Fmetl te
A number o undamental index tracking unds
have also emerged in recent years the key
insight here is that some investors dont believe
that the market always put a sensible price on
some unloved stocks. Some value investorswould rather invest in an index where the
constituents in that index are decided not by
the manic mood swings o the market but by
their undamental value, using measures such
as the dividend yield (higher yielding stocks are
a bigger percentage o the index) or a
combination o undamental actors including
the book value o the companies.
where are o n or e cce?
Perhaps the most important big new
innovation in the world o index tracking unds
is the simplest to understand the multi-asset
portolio. Most investors now run their
portolios in a relatively intelligent, diversied
way - they dont just buy a ew single company
UK stocks and be done with it, but look toinvest across dierent country markets as well
as varying asset classes including bonds, gold
and other commodities. This diversication
means that investors will typically want to run
diversied, multi asset portolios which will
evolve over time. Two key insights stand out
rom this observation the rst is that good
diversication across asset classes makes
absolute sense and in addition that as we grow
older, our tolerance o risk changes very
substantially, orcing us to change the
composition o our portolio.
Imagine you are 20 years old. You are earning
just enough money to put aside say 100 a
month in a und that you will stick with or the
next 40 years o your working lie, but or now
you want lots and lots o growth in your
underlying investments. That means you are
willing to take on some risk now and the
long-term data on returns suggest that the
riskiest, most rewarding o the major asset classes
are equities. Bonds, by contrast, are possibly a bit
boring and sae and although you are probably
never going to lose more than 20 per cent in any
one year (that is called your maximum
drawdown in the trade), equally you are never
going to bag any huge tenbaggers that make your
ortune. In summary, our 20 year-old thrusting
young buck quite sensibly decides that his risk
tolerance is high and that he wants to stack up
on equity exposure and go or it in terms o risk.
Flash orward 40 years. Our young buck is now a
considerably older 60 year old and he knows that
retirement is just ve years away, so he needs to
accumulate a large pot o savings capital to last
him through to his twilight years - he could be
living through until he is 90 years i current
longevity studies are proved right. This means
that capital preservation is all important to this
investor. He absolutely cannot aord a capital loss
or DRAWDOWN o something like 20 per cent in
one year that means he takes a very negative
view o equities and he is a big an o bonds.
Ho or netent tate changea o get oder
This transition in both tolerance o risk and
awareness o potential returns sits at the heart owhat is called liecycle analysis. Over those 40
years our private investor changes both
26 EXCHANGE TRADED | The ETF Boom!
iveto
woe byetl bteveto
te moeymet e
bett ttevetlly
fto wlle t ly
e.
7/30/2019 Exchange Traded Funds - Alliance Trust Savings
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physically and in his tolerance o risk and over
time that translates into a big change in their
choice o assets. Early on our investor is sensibly
interested in equities and probably no bonds,
whereas in their mid 40s they are probably
making the shit away rom equities into some
bonds and by the mid 50 our investor is
probably biased towards bonds. The simple
process o constructing a mix o assets that can
be used as the building blocks o a single
portolio and can change over time, has evolved
into something called the glidepath. The graphic
below shows how this transition starts with
high-risk assets, transitions through a balanced
approach in mid lie and ends with a mixture o
assets with a bias towards bonds later in lie.
Ho a gde ath tranatento a nd
This blindingly simple analysis has evolved
into something called a Risk Target und. As
weve already seen older investors are likely to
be more risk averse, so they are by denition
more conservative in their outlook. Step
orward multi-ETF portolios rom the likes o
Vanguard where the mixture o (passive) asset
classes is labelled Low Risk or Conservative.
By contrast, our younger investor might be
much more risk riendly, and be willing to
ride out the volatile equity markets by
investing in a High risk or Growth/
Adventurous portolio.
The key point is that in these target risk
unds, all the equity, bond or alternative
asset components or this diversied portolio
consist o dierent underlying ETFs or index
tracking unds. The asset classes are then
combined together to orm a diversied,
single portolio which can be bought as a
core investment. Crucially this single
portolio o ETFs or index tracking unds is
usually very low cost (most multi-asset
portolios charge under 0.80% per annum,
with some oering portolios or less than
0.40%) and can be changed as the investors
tolerance o risk changes over time i.e. as
they get older they can sell their adventurous
portolio and opt or a more cautious,
conservative Low risk portolio.
27The ETF Boom! | EXCHANGE TRADED
Tto
bot toleeo wee
o potetlet t
t te eto leyle
ly.
Asset Allocation (%) Source: David Stevenson
Years until retirement
100
80
60
40
20
0
40 35 30 25 20 15 10 5 0 -5 -10
The chart below shows a typical glidepath showing changing exposure over a number o years to bonds (lighter brown)
and equities (darker brown), with range o dierent possible allocations indicated by dotted line.
Opinions expressed are those o
David Stevenson, not Alliance
Trust Savings Limited. Please read
the important inormation at the
end o this publication.
7/30/2019 Exchange Traded Funds - Alliance Trust Savings
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Investments can go down as well as up and capital is at risk.The original amount invested may not be returned.
Past perormance is not a guide to uture perormance.
Not all exchange traded unds/ exchange tradedcommodities (ETF/ ETC) are suitable or all investors assome are high risk and only suitable or sophisticatedinvestors. Beore investing you should ully amiliariseyoursel with the risk actors associated with a und. Pleasereer to the risk actors section o the Prospectus or theKey Investor Inormation Document/ Listings i available.These can be ound on our website or the und managersown website.
I there are any terms you are unamiliar with or you are
unsure o, you may wish to seek nancial advice.Investment in ETF/ETCs may expose investors to any or allo the ollowing risks: risks relating to the relevantunderlying index, credit risks on the provider o indexswaps, exchange rate risks, interest rate risks, infationaryrisks, and liquidity risks.
Non-UCITS compliant unds: Some o the ETF/ETCsavailable through the ATS platorm are Non-UCITS RetailSchemes. These are UK unds that do not comply with allthe UCITS rules and, thereore, cannot be promoted acrossthe EU. They can, however, be sold to UK retail investors.Such unds can invest in a wider range o eligibleinvestments than UCITS. I you are unsure whether a undis UCITS or not please give us a call. I you are unsure o
the implications o this then you may wish to seeknancial advice.
Some o the unds have underlying holdings which aredenominated in currencies other than Sterling andthereore may be aected by movements in exchange rates.Consequently, the value o these investments may rise orall in line with exchange rates.
Inv