ETF Landscape: United Kingdom Industry Review - BlackRock ...

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ETF Landscape Year End 2010United Kingdom Industry Review from BlackRockAdvantages of fixed income products Government, corporate, credit, inflation, interest rate indices. Security: government issued fixed income products are usuallyconsidered risk free. Corporate debt is also considered to belower risk than the company’s equity. In the event of liquidation,bondholders are ranked above shareholders in the claim oncompany assets. Return of capital: the redemption value of bonds ispre-determined at the time of purchase. Income: the coupon rate of bonds is known before investing andprovides the investor with a reliable income stream. Diversification: a diversified portfolio contains multiple assetclasses and eliminates the concentration risk embedded in asingle asset class portfolio. Benefit from falling interest rates: interest rates can belocked in for a defined period. The inverse relationship betweenbond prices and interest rates allows investors to benefit fromrising bond prices during falling interest rate environments. Speculation: fixed income products provide investors withadditional tolls to speculate on future prices of interest rates.Figure 29: Fixed income exhibits low historical correlation with almost all asset classes potentially providing diversificationbenefits to a portfolioAsset class Global bonds 1 Global equities 2 Global property 3 Cash 4 Emergingmarkets 5 Commodities 6Global bonds 1 1.00 – – – – –Global equities 2 0.08 1.00 – – – –Global property 3 0.14 0.84 1.00 – – –Cash 4 0.03 -0.01 -0.05 1.00 – –Emerging markets 5 0.14 0.84 0.77 -0.01 1.00 –Commodities 6 0.23 0.44 0.40 -0.03 0.50 1.001. FTSE EPRA/NAREIT Developed Net Total Return Index.2. MSCI World Net Total Return Index.3. Barclays Capital Global Aggregate Bond Total Return Index.4. USD LIBOR 3M Total Return Index.5. MSCI Emerging Markets Net Total Return Index.6. Dow Jones-UBS Commodity Total Return Index.Note: Index returns are for illustrative purposes only and do not represent actual fund performance. Index performance returns do not reflect any management fees, transactioncosts or expenses. Indices are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. YTD returns reflect US dollarperformance from 2 November 2001 to 29 October 2010.Source: Global ETF Research and Implementation Strategy Team, BlackRock, Bloomberg.Shorting and hedging with ETFs 6ETFs can be sold short to hedge a portfolio of stocks, bonds,commodities or funds. This allows an investor to potentiallypreserve a portfolio while protecting it from overall market losses.In a market decline, profits on an ETF short position could offsetsome of the losses incurred by the portfolio. Options are availableon most ETFs in the United States which can be used for a numberof strategies.Securities lending revenue on ETFs can be attractive for investorswho own ETF shares. The lending revenue that can be earned onETFs, may at times and for some ETFs, more than cover the annualTER. Investors can also use inverse (short) and leverage inverseETFs to implement hedges and short economic exposure.Short interest data is captured for US listed securities on the 15thof each month, or the next business day, and reflects the number ofshares that have yet to be repurchased to give back to lenders. Thehigher the short interest, the more investors are expecting adownturn. Short positions fall in value as stocks rise, and vice versa.The rules on shorting ETFs on financial indices and the use ofinverse and leveraged inverse ETFs on financial indices in thevarious markets are continually being updated as regulators react tomarket conditions and the actions of other regulators – so theposition is quite fluid.There are currently 76 inverse/inverse leveraged ETFs in the USand 103 inverse/inverse leveraged ETFs listed on exchangesoutside the US. Short interest is often considered an indication ofthe level of scepticism in the market.6. With short sales, the investor risks paying more for a security than the investor received from the sale.27 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.
ETF Landscape Year End 2010United Kingdom Industry Review from BlackRockCommodities in your portfolioPortfolio diversification: commodity returns have historicallydisplayed low correlation with equities or other asset classes.As equities and other traditional assets perform well, commoditieshave tended to underperform these asset classes. However, asother asset classes decreased in value, commodities havesometimes provided positive returns for investors. Commodities areoften used to help reduce portfolio risk by adding diversification.Potential portfolio protection: historically, commodities are oneof the few asset classes to have benefited from rising inflation.As demand for goods and services increases, prices of those goodsand services usually also rise, as do the prices of the commoditiesused in their production. Because commodity prices tend to rise inperiods of inflation, investing in commodities can potentially providesome portfolio protection against accelerating inflation.Indices are a convenient way to access a group of commodities.Indices can represent the asset class as a whole or a particularsub-sector, such as energy, agriculture or precious metals.Commodity indices differ in the rules used to gain exposure to theasset class. Does the index track futures prices or spot prices? Howoften is the index rebalanced? Are there minimum and maximumweightings for different sectors or individual commodities? Investorsshould be aware of these rules before investing in structuredproducts linked to indices. This section describes the componentsand methodologies of some of the main commodity indices. Someof the key features are outlined below.In addition, commodities have often proved more resilient thanother asset classes to geopolitical and macro-economic shocks.For example, political crises in emerging markets have sometimestripped up stock markets but left the commodity marketrelatively unaffected.Figure 30: S&P GSCI USD TR Index versus MSCI World USD TR300%250%200%150%100%50%0%300%250%200%150%100%50%0%-50%-50%Jan-96 Apr-97 Jul-98 Oct-99 Jan-01 Apr-02 Jul-03 Oct-04 Jan-06 Apr-07 Jul-08 Oct-09 Dec-10S&P GSCI TRMSCI WorldNote: Index returns are for illustrative purposes only and do not represent actual fund performance. Index performance returns do not reflect any management fees, transactioncosts or expenses. Indices are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Data as at year end 2010.Source: Global ETF Research and Implementation Strategy Team, BlackRock, 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. 28
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