<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 9: Top 25 brokers trading <strong>United</strong> <strong>Kingdom</strong> listed <strong>ETF</strong>s/ETPs, as at end January 2011Broker# reportedtradesBroker advertisedvolume (US$ Mn)Jan-2011% broker advertisedmarket share% total exchangevolumeWinterflood Securities 4,143 $1,785.6 15.8% 13.4%Susquehanna International 237 $1,248.2 11.0% 9.3%Credit Suisse 281 $1,093.9 9.7% 8.2%Labranche Structured Products 269 $853.7 7.5% 6.4%Morgan Stanley 393 $835.1 7.4% 6.3%Deutsche Bank Securities 764 $797.7 7.0% 6.0%Peel Hunt 2,801 $656.8 5.8% 4.9%Goldman Sachs International 615 $632.6 5.6% 4.7%HSBC Bank 1,696 $582.7 5.1% 4.4%Merrill Lynch 977 $494.7 4.4% 3.7%JPMorgan Chase Bank 214 $427.1 3.8% 3.2%Citigroup Global Markets 343 $410.3 3.6% 3.1%Societe Generale 191 $246.5 2.2% 1.9%CA Cheuvreux 587 $179.7 1.6% 1.4%RBS 282 $179.1 1.6% 1.3%Knight Securities 312 $149.2 1.3% 1.1%UniCredit 77 $101.5 0.9% 0.8%Barclays Capital 37 $101.3 0.9% 0.8%UBS 38 $100.3 0.9% 0.8%Nomura International 326 $74.9 0.7% 0.6%Instinet 38 $71.5 0.6% 0.5%Bluefin Europe 65 $68.5 0.6% 0.5%MF Global 81 $52.7 0.5% 0.4%Macquarie Group 25 $44.2 0.4% 0.3%Newedge Group 1 $22.5 0.2% 0.2%Others (36) 310 $120.1 1.1% 0.9%Total 15,103 $11,330.5 100.0% 84.8%Winterflood Securities 15.8% CA Cheuvreux 1.6%Susquehanna International 11.0% RBS 1.6%Credit Suisse 9.7% Knight Securities 1.3%Labranche Structured Products 7.5% UniCredit 0.9%Morgan Stanley 7.4% Barclays Capital 0.9%Deutsche Bank Securities 7.0% UBS 0.9%Peel Hunt 5.8% Nomura International 0.7%Goldman Sachs International 5.6% Instinet 0.6%HSBC Bank 5.1% Bluefin Europe 0.6%Merrill Lynch 4.4% MF Global 0.5%JPMorgan Chase Bank 3.8% Macquarie Group 0.4%Citigroup Global Markets 3.6% Newedge Group 0.2%Societe Generale 2.2% Others (36) 1.1%Note: Contributing brokers publish advertised trades to Bloomberg and can include both reported and OTC trades.Source: Global <strong>ETF</strong> Research and Implementation Strategy Team, <strong>BlackRock</strong>, Bloomberg.7 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>United</strong> <strong>Kingdom</strong> Distributor Status (UKDS)It is worth noting that none of the <strong>ETF</strong>s listed in the <strong>United</strong><strong>Kingdom</strong> are domiciled in the <strong>United</strong> <strong>Kingdom</strong>, which means theyare all considered to be ‘offshore funds’ from a <strong>United</strong> <strong>Kingdom</strong>tax perspective.The offshore funds rules were originally enacted at a time whenthere was a substantial difference between the rates of income taxand capital gains tax, to prevent investors in offshore vehicles fromconverting income accumulated within the offshore vehicle intocapital on the disposal of that interest. The offshore funds rulestherefore provide that gains made on the disposal of an interest inan offshore fund are subject to income tax, rather than capitalgains tax. The effect of this is to increase the tax payable on gainsrealised by the investor from capital gains tax rates (up to 28%)to income tax rates (up to 50%) substantially reducing their profit.The exception to this is for ‘distributor status funds’ (those whichdistribute their income to investors on an annual basis) where theincome is taxed annually and the gain made on disposal is subjectto capital gains tax treatment.Obtaining <strong>United</strong> <strong>Kingdom</strong> distributor status is an importantconsideration for any offshore fund seeking to attract <strong>United</strong><strong>Kingdom</strong> investors, as tax will be a key consideration for investorsselecting an offshore fund. The <strong>United</strong> <strong>Kingdom</strong> offshore fundslegislation treats gains from offshore funds as income, rather thancapital for tax purposes. Gains are thus subject to income tax rates(top rate of 50%) without any capital gains tax relief. However, if thefund obtains <strong>United</strong> <strong>Kingdom</strong> distributor status, gains will be treatedas capital gains which effectively will be subject to capital gains taxat up to 28%, and be entitled to annual exemptions.The existing UKDS regime for funds will be replaced by a new‘Reporting Fund’ system. The new system began on 1 December2009 (specifically fund accounting periods starting on or after1 December 2009), but for existing funds there is a transitionalperiod that stretches into 2012.Source: <strong>BlackRock</strong>, withersworldwide.The new <strong>United</strong> <strong>Kingdom</strong> Reporting Funds(UKRF) systemThe new system does not require funds to distribute income,instead, the requirement is to calculate the fund income per share‘reportable income’ (as calculated on a <strong>United</strong> <strong>Kingdom</strong> tax basis)each year and publish that, most usually on a website. The fund nowhas to report 100% of its income (with a 10% margin for error) ratherthan distribute 85%.A fund applies to join the scheme on a one-time basis with the fundmanager giving formal undertakings to comply with all conditions.The fund keeps the UKRF status unless and until the manager isfound to be in material breach of the conditions (or the fundchooses to leave the regime).How will the new system impact investors?Investors in an existing UKDS fund should only be minimallyimpacted by the transition to UKRF status. Provided either UKDS orUKRF status is in place throughout an investor’s holding period, the‘penal’ Offshore Income Gain taxation will not apply on disposal.It is expected that more funds which have been unable to obtainUKDS will be eligible for UKRF and thus become ‘<strong>United</strong> <strong>Kingdom</strong>tax status’ for the first time.Where a <strong>United</strong> <strong>Kingdom</strong> holder invested in a fund during the earlier‘non UKDS’ period but disposed of the holding after UKRF statuswas obtained, they will have two choices: i) ‘do nothing’, in whichcase their entire gain on eventual disposal will be taxed as anOffshore Income Gain; ii) make an election when filing their taxreturn for a deemed disposal and reacquisition of the holding at thetime UKRF status starts. This means that the Offshore Income Gainis only charged on the earlier ‘non UKDS’ period of ownership.Source: <strong>BlackRock</strong>.There are three different levels of taxation to consider wheninvesting in <strong>ETF</strong>s (which are funds): i) there can be withholding taxat the investment level on distributions from the underlyingsecurities by the local tax authorities. The withholding rates at thislevel will depend on the double tax treaties between the domicileof the holder of the securities (the fund/<strong>ETF</strong>) and the countrywhere the payment has originated; ii) the second level to consideris at the fund level, where the <strong>ETF</strong> itself pays out a dividend to itsholders. Most ‘offshore’ <strong>ETF</strong>s listed in the <strong>United</strong> <strong>Kingdom</strong>typically pay out gross dividends which means there is usually nowithholding tax at this level; and iii) the third level to consider is atthe investor’s level as each investor will have their own unique taxcircumstances for income tax rates, capital gains, tax reliefs etc.Recent <strong>United</strong> <strong>Kingdom</strong> budget changes have narrowed thedifferences between the treatment of distributions from onshoreand offshore funds for <strong>United</strong> <strong>Kingdom</strong> individuals 1 .Selecting the appropriate tools to implement asset allocation views ofclients or advisors is becoming a more involved process due to thegrowing number of available products with differing characteristics.Historically there have been investors who have distinctly preferredeither using high cost active funds (in the search for alpha) or low costpassive funds to achieve their client’s investment objectives, howeverwe are seeing advisors and investors increasingly looking to blendactive and passive strategies within portfolios in an effort to obtainmore effective risk/return profiles in line with the objectives ofthe investor.Fund manager selection is an important consideration when lookingat active products, as many studies have found that most activemanagers do not outperform their local broad market indices. Whencomparing index and active funds there are several factors toconsider such as cost, consistent performance/outperformance invarious market cycles, portfolio transparency, product accessand tradability.Core-satellite investing is an example of a common blendedapproach to building portfolios where a broad based equity or fixedincome index tracking long term investment is held in the ‘core’with various rotating active strategies in place as the ‘satellites’(such as hedge funds, active funds, single country/sector/style<strong>ETF</strong>s or individual securities). The core would account for themajority of the portfolio to capture a diversified market return whilethe satellites provide portfolio flexibility allowing the investor toemploy more sophisticated strategies and take bets on specificmarket views.1. <strong>BlackRock</strong> does not and cannot provide tax advice. Tax treatment of <strong>ETF</strong>s including rates and reliefs may change and will depend upon an investor’s own tax circumstances.<strong>BlackRock</strong> recommends that all clients seek specialist tax advice from their own tax advisors.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. 8
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