The Hidden Dangers of ETFs

November 10, 2012

- Not For Duplication Or Redistribution -

2

Reason #1 to Own Emerging Markets

Market 2011 GDP Growth

GDP/Capita Public Debt/GDP

2012 GDP Growth (Est.)

2013 GDP Growth (Est.)

USA 1.7% $48,427 69.4% 3.3% 3.8%

EU 1.6% $34,488 93.0% -3.0% 3.1%

China 9.2% $5,430 43.5% 9.6% 10.0%

India 7.2% $1,350 51.6% 5.9% 11.1%

Brazil 2.7% $12,674 54.4% -2.0% 3.3%

Mexico 4.0% $14,987 37.5% 4.3% 6.7%

Indonesia 6.5% $3,490 24.5% 9.8% 14.2%

Source: CIA World Factbook and IMF.

3

Reason #2 to Own Emerging Markets

Market October 2009 P/E

October 2010 P/E

Recent P/E

USA 18.0 17.5 16.5

China 40.7 32.1 14.7

Source: Motley Fool research.

4

Reason #3 to Own Emerging Markets

Sep-05

Dec-05

Mar-06

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

-30.00%

-25.00%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

Strength of USD

Strength of USD

5

Reason #4 to Own Emerging Markets

Sep-00

Jan-01

May-01

Sep-01

Jan-02

May-02

Sep-02

Jan-03

May-03

Sep-03

Jan-04

May-04

Sep-04

Jan-05

May-05

Sep-05

Jan-06

May-06

Sep-06

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

May-11

Sep-11

Jan-12

May-12

Sep-12

-100.0%

-50.0%

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

300.0%

350.0%

400.0%

Returns since 2000

Developed Markets Emerging Markets

6

The Problem with Emerging Market ETFs

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

Category v. ETF Representation

Emerging Markets Composite EEM

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The Problem with Emerging Market ETFs

The iShares MSCI Emerging Markets Fund has 2 flaws:

It’s BIG* and it’s DUMB***37 billion of AUM as of 9/28/12

**It’s market-cap weighted, it thinks Korea is an emerging market, it considers businesses based on where they are HQ’d not on where they do business, etc.

8

Variant Views on Emerging Markets Exposure

EEM Top 5 Markets (9/28/12)

China (16.7%)

South Korea (15.5%)

Brazil (12.6%)

Taiwan (11.1%)

South Africa (7.9%)

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Variant Views on Emerging Markets Exposure

EEM Top 5 Industries (9/28/12)

Financials (24.3%)

InfoTech (13.9%)

Energy (13.1%)

Materials (11.8%)

Consumer Staples (8.6%)

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Variant Views on Emerging Markets Exposure

EEM Top 10 Stocks (9/28/12)

Samsung Electronics (Korea/InfoTech)

Taiwan Semiconductor (Taiwan/InfoTech)

China Mobile (China/Telecom)

Gazprom (Russia/Energy)

America Movil (Mexico/Telecom)

China Construction Bank (China/Financials)

Petrobras (Brazil/Energy)

ICBC (China/Financials)

CNOOC (China/Financials)

Hyundai Motor (Korea/Industrials)

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