etf basics: an introduction to ishares
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ETF Basics: An Introduction toiShares® Exchange Traded Funds
ETF
Bas
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Terms of use
•Before using iShares Funds presentation materials with yourclients, please check to ensure that the materials comply withyour firm's guidelines.
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Agenda
•Growth of ETFs and Barclays Global Investors
•The engine of ETFs
•Unique benefits of ETFs and iShares• Low cost
• Tax efficiency
• Transparency
• Risk management
• Liquidity
• Modularity and strategies
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Consistent Growth of Exchange Traded Funds (ETFs)
ETFs experienced rapid growth during bear and bull markets• There are 672 U.S. ETFs – covering global equity and
fixed income with AUM of over U.S. $619 billion.
0
100
200
300
400
500
600
700
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20070
200
400
600
800
1,000
1,200
1,400
1,600U.S. ETF AUM
iSharesOthers
S&P 500
Sources: FRC and Yahoo Finance as of 12/31/07. Universe includes exchange traded grantor trusts.
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iShares Family of Funds and MutualFund Markets In Net New Asset Flows
Fund families serve different market segmentsSource: Strategic Insights as of 11/30/07. Excludes funds of funds and money market funds.Information on American Funds, Vanguard Group, Dodge & Cox, State Street Global Advisors, T. Rowe Price, Dimensional Investment Group, FranklinTempleton Investments, Thronburg and ProFunds is provided strictly for illustrative purposes and should not be deemed an offer to sell or a solicitation ofan offer to buy shares of securities, other than the iShares Funds, that are described in this presentation.
2007Net Flows ($M)
2006 Net Flows ($M)Fund Family
7.62.2ProFunds
9.36.1Thornburg
10.36.7Franklin Templeton Investments
14.415.1Dimensional Investment Group
18.011.0T. Rowe Price
18.01.3State Street Global Advisors
18.019.1Dodge & Cox
46.350.2iShares68.743.1Vanguard
69.670.5American Funds
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iShares Funds are Brought to you byBarclays Global Investors• Total assets managed: $2 trillion• Total active assets managed: $491.5 billion• 3,002 employees worldwide* serving approximately 3,000 clients in 51 countries• Largest ETF manager with more than $388 billion in assets
SAN FRANCISCO
LATIN AMERICA
TORONTO
MONTREAL
AMSTERDAM
BOSTON
LONDON
HK/SINGAPORE
SYDNEY
TOKYO
Full service officeClient service/business development
ATLANTA
*Excluding contractors. Source: BGI. As of 9/30/07.
iShares Funds are distributed by SEI Investments Distribution Co. Barclays Global Fund Advisors (BGFA) serves as an advisor to the Funds. BGFA is a subsidiary of Barclays Global Investors, N.A., a majority-owned subsidiary of Barclays Bank PLC. 57
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WHAT IS AN ETF?
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Familiar Ground…Best of Both Worlds
•Like a stock• Trading flexibility intraday on the exchange
• Long or short*
• Options
•Like an index fund• Constructed to track benchmark indexes
• Low expense ratios
• Low turnover
* With short sales, you risk paying more for a security than you received from its sale. Short sales subject to availability.
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What Sets an ETF Apart?
• The creation/redemption process distinguishes ETFsfrom mutual funds and closed-end funds
• The creation/redemption process enables the uniquebenefits of ETFs
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Sellers
Buyers
Stock Exchange
How Traditional Mutual Funds Work
Fund Company
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Fina
ncia
lIn
term
edia
ries
Mutual funds and iShares Funds are obliged to distribute portfolio gains to shareholders by year-end. These gains may be generated due to indexrebalancing or to meet diversification requirements. Trading shares of the iShares Funds will also generate tax consequences and transaction expenses.Certain traditional mutual funds can be tax efficient as well.
The Innovative Mechanismof iShares ETFs
Fund CompanyMarket Makers
Buyers Sellers
Fina
ncia
lIn
term
edia
ries
Stock Exchange
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The Benefits of iShares ETFs
• Low cost
• Tax efficiency
• Transparency
• Risk management
• Liquidity
• Modularity and strategies
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COSTS OF INVESTINGInternal Fees and Taxes
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Internal fees $3,862
$1,475
$210,556
$7,625
$2930
$14,866
$5,778
$215,892gross value
25 bps 50 bps 100 bps
www.sec.gov/investor/tools/mfcc/fund-label.htmDoes not include commissions or sales charges.
$205,338 $195,249
Foregone earnings
Net value
Internal Expenses Matter• $100,000 investment for 10 years• 8% annualized return
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iShares Funds’ Low Expense Ratios
Fund Category bps iShares ETF Large-cap 9
15iShares S&P 500iShares Russell 1000
Small-cap 2020
iShares S&P SmallCap 600iShares Russell 2000
Fixed income 151520
iShares Lehman Treasury Series iShares iBoxx $ Investment Grade Corporate BondiShares Lehman Aggregate & TIPS
International 523474
iShares MSCI International Series 1, 2
iShares MSCI EAFEiShares MSCI Emerging Markets
Sector 4848
iShares Dow Jones SectorsiShares S&P Global Sectors
1. Brazil, South Africa, South Korea, Taiwan: 68 bps. 2. MSCI Pacific ex-Japan, 50bpsTransactions in shares of the iShares Funds will result in brokerage commissions.
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Tax Efficiency of iShares ETFs
•Index Funds• Low turnover
•Baskets of securities for shares• Creation/redemption process
•Cap gain control• Shareholders interact via exchange
• Taxed as an equity transaction
ETFs can produce capital gain distributions. For example, during an underlying index reconstitution or corporate actions (especially foreign).
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RISK MANAGEMENT
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iShares ETFs are Transparent
•Manage the unknown – know what you own• iShares holdings are published daily on iShares.com
• Pricing of underlying holdings is refreshed continually
•No style drift• Each benchmark represents a defined market segment
• Benchmark providers publish methodology
•Manage risk• iShares ETFs are designed to closely track a benchmark
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iShares Funds Track
Source: BGI.Past tracking performance does not guarantee future performance.
iShares Funds3-Year Average Annual
Tracking (as of 12/31/07)
Expense Ratio (as of 1/1/08)
S&P 500 -0.08% 0.09%
Russell 2000 -0.06% 0.20%
Dow Jones U.S. Total Market -0.21% 0.20%
Dow Jones U.S. Technology -0.60% 0.48%
MSCI Japan -0.53% 0.52%
MSCI EAFE -0.22% 0.34%
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LIQUIDITY
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iShares ETFs Provide Enhanced Liquidity
•Liquidity of underlying securities provides foundation for ETFliquidity
“Exchange-traded” attribute provides additional layers of liquidity
Market participants compete for client orders leading to tighterspreads
Investors receive price improvement by transacting in the ETFwhenever they buy/sell the ETF inside the spread cost of theunderlying portfolio basket of securities
Trading volume is not indicative of total liquidity in an ETF
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iShares ETF Liquidity Offers Price Improvement
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400
600
800
1,000
1,200
1,400
2003 2004 2005 2006
Ann
ual S
hare
s Tr
aded
(mln
s)
$0.00
$0.05
$0.10
$0.15
$0.20
$0.25
$0.30
Spre
ad ($
)
iShares MSCI Emerging Markets (EEM)
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2000
4000
6000
8000
10000
12000
2003 2004 2005 2006
Ann
ual S
hare
s Tr
aded
(mln
s)
$0.00
$0.01
$0.02
$0.03
$0.04
$0.05
Spre
ad ($
)
iShares Russell 2000 (IWM)
EEM Trading VolumeEEM ETF Spread ($)
EEM Underlying PortfolioSpread ($)
IWM Trading VolumeIWM ETF Spread ($)
IWM Underlying Portfolio Spread ($)
Sources: NYSEArca, Stock Facts Pro, 12/06.
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iSHARES MODULARFAMILY OF FUNDS
A Solutions-Driven Approach
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The Benefits of Modularity
•Building block format• Enables implementation of strategies
•Indexing pre-2000 and post-2000
Source: FRC as of 2/28/07. Universe includes exchange traded grantor trusts. 5735
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U.S. Equity Portfolio
Large-capstocks
S&P 1500
S&P 500S&P 500 Growth
S&P 500 Value
S&PSmallCap
600
S&P SmallCap600 Growth
S&P SmallCap600 Value
S&PMidCap
400
S&P MidCap400 Growth
S&P MidCap400 Value
Modularity and Portfolio Completion
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Russell 3000Portfolio of Active
Funds or Managers
Small-capgrowth
Large-capgrowth
Large-capvalue
Small-capvalue
Russell2000
Russell 2000Growth
Russell 2000Value
Russell1000
Russell 1000Growth
Russell 1000Value
RussellMidcap
Russell MidcapGrowth
Russell MidcapValue
Modularity and Core/Satellite
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Modularity and Tactical Investing
Dow JonesU.S. Total Market
Basic Materials
Consumer Goods
Energy
Financial
Healthcare
Industrial
Technology
Telecom
Utilities
Consumer Services
Utilities ConsumerServices
EnergyTechnology
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Lehman 1–3 Year TreasuryLehman 7–10 Year TreasuryLehman 20+ Year TreasuryiBoxx $ Investment Grade Corporate BondLehman 1-3 Year CreditLehman Intermediate CreditiBoxx $ High Yield Corporate
Duration
Yiel
d
Modularity and Duration Management
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Good for Clients. Good for Business.
•Manage costs
•Manage risks
•Manage taxes
•Complementary to your business• Portfolio managers and asset managers
• Wealth managers
• Consultants and advisors
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Carefully consider the iShares Funds’ investmentobjectives, risk factors and charges and expensesbefore investing. This and other information can befound in the Funds’ prospectuses, which may beobtained by calling 1-800-iShares or by visitingwww.iShares.com. Read the prospectus carefullybefore investing.
There are risks involved with investing, includingpossible loss of principal.
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The iShares Funds are distributed by SEI Investments Distribution Co. (SEI). Barclays GlobalFund Advisors (BGFA) serves as an advisor to the Funds. Barclays Global Investors Services(BGIS) assists in the marketing of the Funds. BGFA and BGIS are subsidiaries of BarclaysGlobal Investors, N.A., which is a majority-owned subsidiary of Barclays Bank PLC, none ofwhich is affiliated with SEI.
Shares of iShares Funds are bought and sold at market price (not NAV) and are notindividually redeemed from the Fund.
Mutual funds and iShares Funds are obliged to distribute portfolio gains to shareholders byyear-end. These gains may be generated due to index rebalancing or to meet diversificationrequirements. Trading shares of the iShares Funds will also generate tax consequences andtransaction expenses. Certain traditional mutual funds can be tax efficient as well.
When comparing stocks or bonds and iShares Funds, it should be remembered thatmanagement fees associated with fund investments, like iShares Funds, are not borne byinvestors in individual stocks or bonds. The annual management fees of iShares Funds maybe substantially less than those of most mutual funds. Buying and selling shares of iSharesfunds will result in brokerage commissions, but the savings from lower annual fees can helpoffset these costs.
Neither Barclays Global Investors, N.A. and its affiliates nor SEI and its affiliates provide taxadvice. Please note that (i) any discussion of U.S. tax matters contained in this communicationcannot be used by you for the purpose of avoiding tax penalties; (ii) this communication waswritten to support the promotion or marketing of the matters addressed herein: and (iii) youshould seek advice based on your particular circumstances from an independent tax advisor.
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32 Not FDIC Insured • No Bank Guarantee • May Lose Value
The information provided is not intended to be a complete analysis of every material factrespecting any strategy and has been presented for educational purposes only.The iShares Funds are not sponsored, endorsed, or issued by Lehman Brothers, nor are theysponsored, endorsed, issued, sold or promoted by Cohen & Steers Capital Management, Inc.,Dow Jones & Company, Inc., European Public Real Estate Association (EPRA®”), FTSEInternational Limited (“FTSE”), FTSE/Xinhua Index Limited (“FXI”), iBoxx®, KLD Research &Analytics, Inc., MSCI Inc., Morningstar Inc., The NASDAQ Stock Market, Inc., NationalAssociation of Real Estate Investment Trusts (“NAREIT”), New York Stock Exchange, Inc.,Frank Russell Company, or Standard and Poor’s. None of these companies make anyrepresentation regarding the advisability of investing in the Funds. Neither SEI nor BGI, norany of their affiliates, are affiliated with the companies listed above.FXI does not make any warranty regarding the FTSE/Xinhua Index. All rights in theFTSE/Xinhua Index vest in FXI. Neither FTSE nor NAREIT makes any warranty regarding theFTSE NAREIT Real Estate 50 Index, FTSE NAREIT Residential Index, FTSE NAREIT RetailIndex, FTSE NAREIT Mortgage REITs Index or FTSE NAREIT Industrial/Office Index; allrights vest in NAREIT. Neither FTSE nor NAREIT makes any warranty regarding the FTSEEPRA/NAREIT Global Real Estate ex-US/North America/Europe/Asia, Index; all rights vest inFTSE, NAREIT, and EPRA. All rights in the FTSE Developed Small Cap ex-North AmericaIndex vest in FTSE. "FTSE" is a trade- and servicemark of London Stock Exchange and TheFinancial Times Limited; "Xinhua" is a trade- and servicemark of Xinhua Financial NetworkLimited. “NAREIT®” is a trademark of NAREIT; “EPRA®” is a trademark of EPRA.2008 Barclays Global Investors. All rights reserved. iShares® is a registered trademark ofBarclays Global Investors, N.A. All other trademarks, servicemarks or registered trademarksare the property of their respective owners. 57
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