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

ETF Landscape Year End 2010United Kingdom Industry Review from BlackRockFigure 35: Deciding on which product to use depends on many factorsConsiderations Questions Products Product structure Domicile Country registrations Portfolio holdings Assets Under Management Average daily trading volume ETF provider / manager Transparency Client service Product choice What is my benchmark? What are my regulatory guidelines? What are my mandate constraints? What are my counterparty riskguidelines? What are my tracking riskguidelines? How can I gain long and/orshort exposure? How can securities lendingadd value? What is my time horizon? What are the tax implications? What are my liquidityrequirements? What costs are involved? Portfolio trading ETFs ETNs ETPs Swaps Futures Options Securitised products:certificates, warrants,equity linked notes,local access products LiquiditySource: Global ETF Research and Implementation Strategy Team, BlackRock.Factors to consider when selecting an ETFObjectives: assess your financial goals.Strategy: look for the right ETF to complement your portfolio.Ensure you read the prospectus and other documentation publishedby the ETF provider prior to investing.Risks: the value of your investment may go up or down. Check thespecific risks (i.e. political, economic and currency risks wheninvesting in an ETF providing exposure to an emerging market,country or region) and tax implications.The index: even ETFs with very similar sounding names can bebased on very different constituents. Index providers have differentindex methodologies which will determine the holdings, weights andrebalance frequency, which will result in different risk and rewardcharacteristics. Understanding the index is an important step inthe process.The structure: regulatory changes and innovations in structureshave seen ETPs move beyond the conventional open-ended fundstructure of an ETF. Additionally, open-ended funds can, in manyjurisdictions, embrace the use of swaps and other derivatives, whichmay change the risk characteristics and may limit the product’stransparency compared to traditional physical ETFs, particularly inrelation to the fund’s list of holdings. The size of the ETF in terms ofAUM will often dictate how much certain investors can invest inan ETF.Total costs: the fund’s Total Expense Ratio (TER), not just theManagement Expense Ratio (MER), is a major considerationwhen comparing costs between ETFs. Trading costs, tracking risk,registrations, trading currency, dividend withholding rates andsecurities lending within the fund and lending of the ETF should allbe considered.Liquidity: ETFs afford investors two forms of liquidity. The first isthrough trading the shares on a secondary basis on-exchange. Thesecond is on a primary basis via the unique ‘creation’ process,whereby an AP purchases the underlying basket of securities in thelocal market and deposits the basket ‘in kind’ into the ETF, creatingmore shares in that ETF. The unique creation/redemption processmeans that the liquidity in the ETF is driven by the liquidity in theunderlying securities. Similar indices can have different liquidityprofiles based on their index methodology.ETF provider: the type and amount of information provided ontheir ETFs, index construction and methodology, tax and indexmanagement knowledge, as well as the level and type of supportprovided to investors, intermediaries and brokers varies based onthe size, scale and expertise of the provider.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. 32