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1 1 Understanding Exchange Traded Funds Presented by Paul Baiocchi Director, Sector Investment Strategy September 9, 2015

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ETFs Understanding

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Page 1: Understanding ETFs

1 1

Understanding

Exchange Traded Funds

Presented by

Paul Baiocchi Director, Sector Investment Strategy

September 9, 2015

Page 2: Understanding ETFs

2 2

AGENDA

• What is an ETF/ETP?

– ETF basics

– ETFs vs. mutual funds

– Different ETF structures

• The ETF Market

– By asset class

– By issuer

– Trends

• Fidelity’s ETF Ecosystem

– Fidelity’s ETF products

– Fidelity’s ETP tools and resources

Page 3: Understanding ETFs

3

What is an ETF/ETP?

Page 4: Understanding ETFs

4

What is an ETF? ETF Basics: Know Your Tickers

• An ETF is an evolution of the mutual fund which: – Trades intraday

– Typically discloses holdings daily

– Can be optioned, shorted, or margined

– Potentially more tax efficient

Page 5: Understanding ETFs

5

ETF

Shareholder

Broker/Dealer

Market Maker/Authorized Participant

Demand exceeds supply of ETF shares on Secondary Market

What is an ETF? ETFs vs. Mutual Funds

Mutual Fund

Stock Market

Shareholder

Mutual Fund

1

2

3

ETF

Stock Market

Authorized Participant

Basket of Securities

1

2

ETF Shares

3

3 Mutual fund shares are delivered to the shareholder @ NAV

Shareholder sends cash to the mutual fund directly 1

Mutual fund purchases securities from the market 2

AP acquires the basket of securities from the market

AP delivers the basket and cash to the ETF 2

ETF delivers ETF shares @ NAV to AP 3

1

Page 6: Understanding ETFs

6 6

What is an ETF? Traditional Mutual Fund Purchase Process

Shareholder sends cash to the mutual

fund directly 1

Mutual fund shares are delivered to the

shareholder @ NAV 3

Mutual fund purchases securities from

the market 2

Mutual fund trades are taxable

events to the fund

Mutual Fund

Stock Market

Shareholder

Mutual Fund

1

2

3

Page 7: Understanding ETFs

7 7

Scenario 2 Scenario 1

What is an ETF? ETF Share Purchase Scenarios

Supply of ETF shares on Secondary Market

satisfies demand

Create Required: Demand exceeds supply of ETF shares

on Secondary Market

ETF

Stock Market

Shareholder

Broker/Dealer

Market Maker

Authorized

Participant

$

$ Primary

Market

$

MP

MP

NAV

SEC

MP $

BOS

Seco

nd

ary

Mark

et

Shareholder

Broker/Dealer

Market Maker

$

$

MP

MP

Se

co

nd

ary

Ma

rke

t

KEY

Individual Securities SEC

Basket of Securities BOS

Cash

ETF Shares at Market Price

ETF Shares at NAV

$ MP

NAV

Page 8: Understanding ETFs

8

ETFs

What is an ETF? Comparing ETFs and Mutual Funds

MUTUAL FUNDS

Costs Expense Ratios

Commissions

Bid-Ask Spreads

Premiums/Discounts to NAV

Expense Ratios

Load and No-load funds

Bought/Sold at NAV (may have redemption fees)

Bought/Sold at NAV (no load funds)

Trading

Attributes

Intra-day trading on secondary Market

Allows Limit, Stop and Conditional Orders

Allows Shorting and Margin

Most transact once a day at close

No Stop, Limit or Conditional Orders

No Shorting (Margin 30 days)

Access,

Transparency

& Taxes

Many sub-sector and industry-focused ETPs in addition to broader market ETPs

Transparency of all holdings nightly

Cap gains tend to be lower because of Create/Redeem

Most funds focus on broader

markets; few sub-sector funds

Holdings data usually at least 1 month old

Less tax efficient structure, all shareholders bear tax burden

Page 9: Understanding ETFs

9 9

Expense Ratio

What is an ETF? The Full Cost of Ownership

Bid/Ask Spread

Commission/Trading Fee

Taxes

Tracking Error/Alpha

Bid is the price at

which one can sell.

Ask is the price at

which one can buy.

Additional costs

are incurred as

the bid/ask

spread widens.

In this case, the

opening value of

the underlying

basket is above

the ask.

Image for illustrative purposes only.

Page 10: Understanding ETFs

10 10

Risks: Biggest Does Not Mean Best

Source: Bloomberg as of 7/31/15. Performance data shown represents past performance and is no

guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or

loss when shares are sold. Current performance may be higher or lower than that quoted.

-20%

0%

20%

40%

60%

80%

100%

120%

140%

Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15

iShares China Large-Cap ETF (FXI)

iShares MSCI China ETF (MCHI)

Powershares Golden Dragon China Portfolio (PGJ)

SPDR S&P China ETF (GXC)

Ticker AUM (MM)

PGJ $193

MCHI $2,043

GXC $1,054

FXI $6,594

Page 11: Understanding ETFs

11 11

What is an ETP? Different Exchange Traded Product Structures

Grantor Trusts Partnerships ETNs

Traditional ETFs

• Are unsecured debt obligations of the issuer

• Tend to focus on commodities and currencies

• Investor assumes the credit risk of the ETN issuer

• ETNs do not provide an ownership interest in any underlying assets

• Are open-end registered investment companies

• Can be either index or actively managed (most are index)

• Can hold different types of securities

• Most ETFs use this structure

• Trust’s holdings typically do not change

• Often used for Commodity & Currency ETPs

• Many hold physical commodities or currencies, but can hold securities

• Mostly used for Commodity ETPs

• Often used for ETPs that invest in futures contracts

• Investors treated as partners for tax purposes and receive a Schedule K-1

Page 12: Understanding ETFs

12 12

Risks: True Cost

Source: Morningstar, Bloomberg as of 7/31/15.

0.95%

0.79%

0.51%

0.40%

0.28% 0.26%

0.23%

Alternative Allocation Commodities Convertibles Equity Tax Preferred Fixed Income

Asset Weighted Expense Ratio

Not All Expense Ratios are Created Equal

Page 13: Understanding ETFs

13 13

ETF Trading Spreads

Source: SSgA

TOTAL COST OF BID/

ASK SPREAD

ETF

Spread

Ask Price Market Maker P&L

Creation Costs

Forex Hedging Costs

Taxes

Brokerage Fees

Underlying

NAV Underlying Bid/Ask

Brokerage Fees

Taxes

Forex Hedging Costs

Redemption Fees

Bid Price Market Maker P&L

Spre

ad

Creation/

Redemption Fee

Cost to Gather

Underlying Securities

Cost of Risk

$

$

$

Page 14: Understanding ETFs

14

The ETF Market

Page 15: Understanding ETFs

15 15

AU

M The ETF Market

Growing Rapidly: 24% CAGR Over the Past 10 Years Ju

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$-

$500

$1,000

$1,500

$2,000

$2,500

Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over

a specified period of time longer than one year.

Source: Morningstar as of 6/30/15 AUM ($B)

Now more

than

$2 trillion

in AUM

Page 16: Understanding ETFs

16 16

AU

M The ETF Market

Growing Rapidly: Equities Still Dominate, but Fixed Income Growing

Source: Morningstar as of 6/30/15

Bond

ETFs now

15% of

ETF AUM

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jun-0

5

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Jun-0

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Jun-0

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5

Municipal Bond

Allocation

US Equity

Taxable Bond

Sector Equity

International Equity

Commodities

Alternative

Page 17: Understanding ETFs

17

The ETF Market The “Big Three” Dominate

• Responsible for 80% of ETF AUM

• Sponsor 18 of the top 20 ETFs by AUM

• Provide predominantly low-cost, passive exposure to core assets classes

June 2015

League Table

AUM by Issuer

Division Name

Issuer June 2015 AUM ($B)

Blackrock 807

Vanguard 477

SSgA 419

Total 1,702

Page 18: Understanding ETFs

18 18

The ETF Market Beyond the “Big Three”, Other Issuers Offer Choice

$11

$12

$19

$21

$25

$31

$35

$39

$63

$92

ALPS

PIMCO

Deustchebank

Market Vectors

ProShares

Guggenheim

Charles Schwab

First Trust

WisdomTree

PowerShares

AUM ($B)

Source: Morningstar as of 6/30/15

Smaller Issuers

Providing

Focused, Nuanced

Exposure

Page 19: Understanding ETFs

19

The ETF Market

Trends to Watch

• Smart/Strategic Beta

– Passive Indexes focused on Factors

• Currency Hedged – Removing currency movements from foreign equity exposure

• Active Fixed Income – Tapping into manager expertise and leverage scale

• Sector Rotation – Using Sector ETFs to rotate among economic sectors

Page 20: Understanding ETFs

20

Fidelity’s ETF Ecosystem

Page 21: Understanding ETFs

21 21

Fidelity ETFs Fidelity Sector ETFs

Why Fidelity

Sector Index ETFs?

Bringing together Fidelity’s asset management

expertise and BlackRock’s infrastructure, the

Fidelity MSCI Sector Index ETF suite provides

world class comprehensive, transparent, and

efficient exposure to all 10 sectors of the market.

1 Free commission offer applies to online purchases of Fidelity ETFs in a Fidelity brokerage account with

a minimum opening balance of $2,500. The sale of ETFs are subject to an activity assessment fee (of

between $0.01 to $0.03 per $1000 of principal) by Fidelity. After 02/01/2014, Fidelity ETFs are subject to

a short-term trading fee by Fidelity, if held less than 30 days.

Purchase Information

Net Expense Ratio: 0.12%

Stock Exchange: NYSE Arca

Fidelity Trading Fees1: Purchase commission Free/30-day

short-term trading fee1

FDIS Fidelity MSCI Consumer Discretionary Index ETF

FSTA Fidelity MSCI Consumer Staples Index ETF

FENY Fidelity MSCI Energy Index ETF

FNCL Fidelity MSCI Financials Index ETF

FHLC Fidelity MSCI Health Care Index ETF

FREL Fidelity MSCI Real Estate Index ETF

FIDU Fidelity MSCI Industrials Index ETF

FTEC Fidelity MSCI Information Technology Index ETF

FMAT Fidelity MSCI Materials Index ETF

FCOM Fidelity MSCI Telecommunication Services Index ETF

FUTY Fidelity MSCI Utilities Index ETF

Tickers and Fund Names

Page 22: Understanding ETFs

22 22

Fidelity ETFs Fidelity Active Fixed Income ETFs

Fidelity Limited Term

Bond ETF (FLTB)

Fidelity Total Bond ETF

(FBND)

Fidelity Corporate Bond

ETF (FCOR)

AUM: $142.9M

30 Day SEC Yield: 1.17%

Effective Duration: 2.81 years

AUM: $104.4M

30 Day SEC Yield: 3.37%

Effective Duration: 5.35 years

AUM: $29.4M

30 Day SEC Yield: 3.43%

Effective Duration: 6.86 years

Summary

A credit oriented strategy serving

clients with shorter investment

horizons

The multi sector approach reflects

some of the capabilities Fidelity

has to offer and brings a depth

and breadth of resources to

serve client needs

A credit oriented strategy

serving clients with longer

investment horizons

Cost

• Expense Ratio: 45 bps

• Commission Free Trading

• Expense Ratio: 45 bps

• Commission Free Trading

• Expense Ratio: 45 bps

• Commission Free Trading

DURATION SPECTRUM

SHORTER LONGER

Assets noted are as of 06/30/2015. Information presented, including 30 day SEC yield,

effective duration, and fee are as of 07/16/2015. Source Fidelity Investments.

22

Page 23: Understanding ETFs

23 23

Fidelity’s Commission Free ETF Platform Fidelity’s Platform Offers Both Active & Passive ETFs

Our ETF Strategy Seeks to Deliver

Innovation

Choice

Value

• iShares® ETFs – choose

from 70 iShares® with broad

and diverse asset classes

• Fidelity 11 sector ETFs with

some of the lowest expense

ratio in the industry

• Buy online commission-free

all 70 iShares® ETFs,

Fidelity sector ETFs &

Fidelity active ETFs

• Active ETFs – with the

launch of 3 Fidelity Active

Fixed Income ETFs, Fidelity

is poised to be a leading

innovator in the active ETF

space

Free commission offer applies to online purchases of Fidelity ETFs and select iShares ETFs in a Fidelity brokerage account. Fidelity accounts may require minimum balances. The sale of ETFs is

subject to an activity assessment fee (of between $0.01 to $0.03 per $1,000 of principal). iShares ETFs and Fidelity ETFs are subject to a short-term trading fee by Fidelity if held less than 30 days.

Strategic Insight Simfund/FI Desktop, data as of 07/31/2013. Based on a comparison of total expense ratios for U.S. sector-level ETFs with similar holdings and investment objectives (using the MSCI

and S&P Global Industry Classification System — GICS) within the universe of 298 ETFs Morningstar has classified as the Sector Stock asset class.

For iShares ETFs, Fidelity receives compensation from the ETF sponsor and/or its affiliates in connection with an exclusive, long-term marketing program that includes promotion of iShares ETFs and

inclusion of iShares funds in certain FBS platforms and investment programs. Additional information about the sources, amounts, and terms of compensation is described in the ETF’s prospectus and

related documents. Fidelity may add or waive commissions on ETFs without prior notice. BlackRock and iShares are registered trademarks of BlackRock, Inc. and its affiliates.

ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold

at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.

Page 24: Understanding ETFs

24 24

Fidelity’s Commission Free ETF Platform Finding Commission Free ETFs

Look for the

Commission Free

Logo in your ETF

Screen

1 Free commission offer applies to online purchases of Fidelity ETFs and

select iShares ETFs in a Fidelity brokerage account. Fidelity accounts

may require minimum balances. The sale of ETFs is subject to an

activity assessment fee (from $0.01 to $0.03 per $1,000 of principal).

iShares ETFs and Fidelity ETFs are subject to a short-term trading fee

by Fidelity if held less than 30 days.

For illustrative purposes only.

Page 25: Understanding ETFs

25 25

For illustrative purposes only.

Fidelity’s ETF Tools and Resources ETF/ETP Research

25

Page 26: Understanding ETFs

26 26

Fidelity’s ETF Tools and Resources ETF/ETP Research—Landing Page

• Quickly start a screen using the 4

available tabs:

Geography/Region

Country

Sector, or

Asset Class

For illustrative purposes only.

• The landing page has a variety

of tools and resources available:

For example, you can quickly:

Track the market

Locate an ETP by holdings

Read expert ideas

View the top ten ETPs

Page 27: Understanding ETFs

27 27

Fidelity’s ETF Tools and Resources ETF/ETP Research Highlights

• ETF Screener and Market Tracker

• Find ETFs by Basket Holdings

• Top 10 ETP Lists

• ETF Education and 3rd Party Research

& Commentary

• ETF Portfolio Builder

Page 28: Understanding ETFs

28 28

Fidelity’s ETF Tools and Resources Live Support

800.544.5115

to speak with one of our knowledgeable

representatives

a Fidelity Investor Center

for a consultation with one of our investment

professionals

Tell us how we can help you today.

CALL VISIT

You Have Access to Even More Resources

Page 29: Understanding ETFs

29 29

Diversification does not ensure a profit or guarantee against loss.

Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market,

or economic developments.

Free commission offer applies to online purchases of Fidelity ETFs and select iShares ETFs in a Fidelity brokerage account which

may require a minimum opening balance of $2,500. The sale of ETFs is subject to an activity assessment fee (from $0.01 to $0.03 per

$1,000 of principal). iShares ETFs and Fidelity ETFs are subject to a short-term trading fee by Fidelity if held less than 30 days.

Exchange-traded products (ETPs) are subject to market volatility and the risks of their underlying securities, which may include the risks

associated with investing in smaller companies, foreign securities, commodities, and fixed income investments. Foreign securities are subject to

interest rate, currency-exchange rate, economic, and political risks, all of which are magnified in emerging markets. Exchange-traded products

(ETPs) that target a small universe of securities, such as a specific region or market sector, are generally subject to greater market volatility, as

well as to the specific risks associated with that sector, region, or other focus. ETPs that use derivatives, leverage, or complex investment

strategies are subject to additional risks. The return of an index ETP is usually different from that of the index it tracks because of fees,

expenses, and tracking error. An ETP may trade at a premium or discount to its net asset value (NAV) (or indicative value in the case of

exchange-traded notes). Each ETP has a unique risk profile, which is detailed in its prospectus, offering circular, or similar material, which

should be considered carefully when making investment decisions.

ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses.

Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually

redeemed from the fund.

The S&P 500 Index is a market capitalization–weighted index of 500 common stocks chosen for market size, liquidity, and industry group

representation to represent U.S. equity performance.

Important Information

Page 30: Understanding ETFs

30 30

The percentage of fund assets used to pay for operating expenses and management fees, including 12b-1 fees, administrative fees, and all

other asset-based costs incurred by the fund, except brokerage costs. Fund expenses are reflected in the fund's NAV. Sales charges are not

included in the expense ratio.

Because of their narrow focus, sector funds tend to be more volatile than funds that diversify across many sectors and companies.

Nondiversified sector funds may have additional volatility because they can invest a significant portion of assets in securities of a small number

of individual issuers.

Because FMR concentrates the funds’ investments in a particular industry, the funds’ performance could depend heavily on the performance of

that industry and could be more volatile than the performance of less concentrated funds and the market as a whole.

The funds are considered nondiversified and can invest a greater portion of assets in securities of individual issuers than a diversified fund; thus

changes in the market value of a single investment could cause greater fluctuations in share price than would occur in a more diversified fund.

Before investing in any mutual fund or exchange-traded fund, you should consider its investment objectives,

risks, charges, and expenses. Contact Fidelity for a prospectus, offering circular, or, if available, a summary

prospectus containing this information. Read it carefully.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

733779.1.0

Important Information