<strong>ETF</strong> <strong>Landscape</strong> Year End 2010<strong>United</strong> <strong>Kingdom</strong> <strong>Industry</strong> <strong>Review</strong> from <strong>BlackRock</strong>Figure 15: <strong>United</strong> <strong>Kingdom</strong> institutions reported holding <strong>ETF</strong>s# institutions140120100806040200Region <strong>ETF</strong> listed 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Any <strong>ETF</strong> 9 12 15 25 37 55 61 55 79 87 112 120US listed <strong>ETF</strong> 9 12 13 24 36 51 55 51 71 77 92 102Europe listed <strong>ETF</strong> - - - - - 3 6 4 18 25 39 47ROW listed <strong>ETF</strong> - - 2 2 4 8 9 4 8 10 20 22Source: Global <strong>ETF</strong> Research and Implementation Strategy Team, <strong>BlackRock</strong>, Thomson Reuters.15 This document is not an offer to buy or sell any security or to participate in any trading strategy. Please refer to important information and qualifications at the end of this material.
<strong>ETF</strong> <strong>Landscape</strong> Year End 2010<strong>United</strong> <strong>Kingdom</strong> <strong>Industry</strong> <strong>Review</strong> from <strong>BlackRock</strong><strong>ETF</strong> background<strong>ETF</strong>s are one of the more innovative new financial products toemerge from the financial industry in the last two decades. Sincethe launch of the first <strong>ETF</strong> in Canada in 1990, <strong>ETF</strong>s have opened anew panorama of investment opportunities. Essentially, <strong>ETF</strong>s areopen-end index funds that are listed and traded on exchanges likestocks. They allow investors to gain broad exposure to stockmarkets of different countries, emerging markets, sectors andstyles as well as fixed income and commodity indices with relativeease on a real-time basis and at a lower cost than many other formsof investing. <strong>ETF</strong>s are more transparent than traditional funds as themanagers provide the <strong>ETF</strong> portfolio composition to the market on adaily basis.<strong>ETF</strong>s are bought on a commission basis, just like many other shares.Generally: 1) they can be purchased on margin and are lendable,2) they can be bought and sold at market, limit or as stop orders,and 3) they do not have any sales loads, although they do haveannual expenses that range from 0.00% to 1.90% 1 . <strong>ETF</strong>s have someof the lowest expense ratios among registered investment products.The annual expenses are usually deducted from dividend payments,which are typically paid on a semi-annual basis.<strong>ETF</strong>s possess characteristics that make them an alternative tofutures and portfolios of shares for investors who are seeking togain or reduce country, regional, sector and style as well as fixedincome and commodity exposure. <strong>ETF</strong>s are index funds and notsynthetic derivatives. They trade and settle like single shares andare typically backed by baskets of securities designed to trackindices. On most exchanges <strong>ETF</strong>s can be used to go long and short 2 .<strong>ETF</strong>s offer diversified exposure and generally have lower expenseratios than traditional active and index funds.<strong>ETF</strong>s may prove as liquid as the underlying basket of securities asthey have a unique daily creation and redemption process. Theability to continually create or redeem shares helps keep an <strong>ETF</strong>’smarket price in line with its underlying Net Asset Value (NAV). A keyfeature that distinguishes <strong>ETF</strong>s is that the shares are created byAuthorised Participants (APs) or creation/redemption brokers inblock-size ‘creation units’.The creator of <strong>ETF</strong> shares typically deposits into the applicable funda portfolio of securities closely approximating the holdings of theindex in exchange for an institutional block of <strong>ETF</strong> shares (usually50,000). Similarly, they can only be redeemed in redemption units,mainly ‘in-kind’ for a portfolio of securities held by the fund. Theredemption and creation processes are very similar.A key benefit of the in-kind distribution of securities is that it doesnot create a tax event in the <strong>United</strong> States, which could occur if thefund sold securities and delivered cash. This is a special advantageof <strong>ETF</strong>s versus an open-end mutual fund, which might have to sellsecurities to meet cash redemptions.Many institutional investors, intermediaries, family offices andself-directed retail investors have embraced the idea that <strong>ETF</strong>s aretools that can help them to equitise cash, establish a core holding,use for Tactical Asset Allocation (TAA) and which can be asubstitute for a program trade or using futures.They can be used to gain exposure to equity sectors, styles, country,regional, international and emerging market indices, government,corporate bond, money market indices as well as commodityindices at real-time prices during the trading day.The challenging market conditions of 2008 caused a significant shiftin investors’ risk appetite in their evaluation of counterparty risk andtheir desire for liquidity. During 2009 many investors turned to <strong>ETF</strong>sto help meet their desire for greater transparency in relation to theissues of cost, transparency of holdings, transparency of price,liquidity, product structure, risk and return as they relate toinvestment alternatives.<strong>ETF</strong>s are index-based 3 open-ended funds that can be bought andsold as quickly and easily as ordinary shares on a stock exchange –they have become popular and widely used investment vehicles toachieve many investment strategies: To gain diversified exposure to a market For core/satellite investing For buy and hold investing For active traders who wish to take advantage ofmarket movements For investors wishing to hedge the market As an alternative to futures and other institutionalinvestment tools.All financial investments involve an element of risk. Therefore, thevalue of an investment in <strong>ETF</strong>s and the income from it will vary andthe initial investment amount cannot be guaranteed.In a world where investment products come and go with the blink ofan eye, <strong>ETF</strong>s might be considered one of the most innovativefinancial products in the last two decades. They have fundamentallychanged how both institutional and retail investors construct theirinvestment portfolios.<strong>ETF</strong> providers have continued to expand their product ranges inmore specialised areas to cater for the growing number ofprofessional and retail investors using <strong>ETF</strong>s as advanced portfolioconstruction tools. The increasing availability of thesehighly-specialised <strong>ETF</strong>s across the full spectrum of equities, fixedincome and alternative investments now ensures that investors canuse <strong>ETF</strong>s to instantly reallocate capital to take advantage of newinvestment opportunities.The use of <strong>ETF</strong>s is often driven by macro trends and volatility. Thechanges in investor sentiment are illustrated in the net new assetdata into <strong>ETF</strong>s tracking fixed income indices, equity indices,emerging market indices and commodities.We have documented and discussed for many years the growinguse of <strong>ETF</strong>s by institutional investors around the world. See <strong>ETF</strong><strong>Landscape</strong>, Annual <strong>Review</strong> of Institutional Users of <strong>ETF</strong>sin 2008 report 4 .1. Source: Various <strong>ETF</strong> providers, Global <strong>ETF</strong> Research and Implementation Strategy Team, <strong>BlackRock</strong>, as at year end 2010.2. With short sales, the investor risks paying more for a security than the investor received from the sale.3. Most are index-based, but some are active.4. The <strong>ETF</strong> <strong>Landscape</strong> Annual <strong>Review</strong> of Institutional Users of <strong>ETF</strong>s in 2008 looked at the use of <strong>ETF</strong>s by institutional investors globally who reported holding one or more <strong>ETF</strong>s intheir mutual fund holding disclosures, or in different filing sources including 13F, 13D and 13G, proxy or other declarable stakes during any of the four quarters of 2008 basedon data compiled by Thomson Reuters.Source: Global <strong>ETF</strong> Research and Implementation Strategy Team, <strong>BlackRock</strong>, Bloomberg.This document is not an offer to buy or sell any security or to participate in any trading strategy. Please refer to important information and qualifications at the end of this material. 16
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