ETF Landscape: Celebrating 10 Years of ETFs in Europe - BlackRock

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ETF Landscape April 2010Celebrating 10 Years of ETFs in Europe 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 is predeterminedat 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 35: Fixed income exhibits low historical correlation with almost all asset classes potentially providing diversificationbenefits to a portfolioAsset classes Global property 1 Global equities 2 Global bonds 3 Cash 4 Emerging markets 5Global property 1 1.00 0.66 0.07 -0.06 0.60Global equities 2 0.66 1.00 -0.09 -0.04 0.57Global bonds 3 0.07 -0.09 1.00 0.03 -0.03Cash 4 -0.06 0.04 0.03 1.00 -0.06Emerging markets 5 0.60 0.57 -0.03 -0.06 1.001. FTSE EPRA/NAREIT Global Index.2. MSCI World Index.3. Barclays Capital Global Aggregate Bond Index.4. LIBOR 3M Index.5. MSCI Emerging Markets Index.Note: Past performance is no guarantee of future results.Source: Bloomberg, Datastream, May 2001 to May 2008.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. Ina market decline, profits on an ETF short position could offset someof the losses incurred by the portfolio. Options are available onmost 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. There arecurrently 67 inverse/inverse leveraged ETFs in the United Statesand 81 inverse/inverse leveraged ETFs listed on exchanges outsidethe US. Short interest is often considered an indication of the levelof scepticism in the market.Short interest data is captured for United States listed securities onthe 15th of each month, or the next business day, and reflects thenumber of shares that have yet to be repurchased to give back tolenders. The higher the short interest, the more investors areexpecting a downturn. 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.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. 39
ETF Landscape April 2010Celebrating 10 Years of ETFs in Europe from BlackRockCommodities in your portfolioPortfolio diversificationCommodity returns have historically displayed low correlation withequities or other asset classes. As equities and other traditionalassets perform well, commodities have tended to underperformthese asset classes. However, as other asset classes decreased invalue, commodities have sometimes provided positive returns forinvestors. Commodities are often used to reduce portfolio risk byadding diversification.Portfolio protectionHistorically, commodities are one of the few asset classes to havebenefited from rising inflation. As demand for goods and servicesincreases, prices of those goods and services usually also rise, asdo the prices of the commodities used in their production. Becausecommodity prices tend to rise in periods of inflation, investing incommodities can potentially provide some portfolio protectionagainst accelerating inflation. In addition, commodities have oftenproved more resilient than other asset classes to geopolitical andmacro-economic shocks. For example, political crises in emergingmarkets have sometimes tripped up stock markets but left thecommodity market relatively unaffected.Figure 36: S&P GSCI USD TR Index versus MSCI World USD TR% accumulated US$ total return400%350%300%250%200%150%100%50%0%-50%-100%Dec-95Dec-96Dec-97Dec-98Dec-99Dec-00Dec-01Dec-02Dec-03Dec-04Dec-05Dec-06Dec-07Dec-08Dec-09MSCI WorldS&P GSCIData as at end December 2009.Source: Global ETF Research and Implementation Strategy Team, BlackRock, Bloomberg.Indices are a convenient way to access a group of commodities. Indices can represent the asset class as a whole or a particular sub-sector,such as energy, agriculture or precious metals. Commodity indices differ in the rules used to gain exposure to the asset class. Does theindex track futures prices or spot prices? How often is the index rebalanced? Are there minimum and maximum weightings for differentsectors or individual commodities? Investors should be aware of these rules before investing in structured products linked to indices. Thissection describes the components and methodologies of some of the main commodity indices. Some of the key features are outlined below.Why include commodities in your portfolio?Strategic A long-only passive investment in commodities provides investors with significant portfolio benefits. Counter cyclical with stocks and bonds. Diversification when you need it most. Best Macro Economic Hedge against rising growth. High equity-like returns.Tactical Outlook for commodity investment returns is both cyclically and secularly bullish. Severe capacity constraints due to lack of infrastructure investment. Significant benefits are expected to come from backwardation in the energy markets.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. 40
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ETF Landscape: Celebrating 10 Years of ETFs in Europe - BlackRock

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