ETF.com and Brown Brothers Harriman

ETFs have become a true global phenomenon, with assets hovering around $3 trillion today.

Brown Brothers Harriman, in partnership with ETF.com, surveyed US financial advisors and European investors to identify key trends, highlight changing sentiment, and explore areas of innovation in the dynamic ETF marketplace.

In this report, we provide the full survey results and findings for both the third-annual US Advisor Survey and the inaugural European Investor Survey. Sophisticated ETF investors, and ETF sponsors looking to create new and innovative products, will find the results noteworthy.

US Advisor Survey and European Investor Survey Results

SURVEY RESULTS AND FINDINGSAt BBH, we have launched ETFs with more than 25 ETF sponsors totaling more than $300 billion in ETF assets under custody. Based on our deep ETF product knowledge and experience, we make every effort to pass valuable insights on to our clients.

ETF.com2

US HIGHLIGHTS

• Advisors are making very few trades in client accounts 73% of respondents make between 1 and 5 trades in a client account per month. This places greater importance on long-term holding costs, such as expense ratios, as opposed to trading costs (i.e., commissions and spreads).

• Advisors are willing to consider active funds or active ETFs with shorter track records Only 20% need an active fund or active ETF to have a track record of over 3 years.

• Smart Beta is on the rise 99% of respondents plan to maintain or increase their exposure to smart beta over the next year.

• Liquidity is becoming more of a focus 59% of respondents feel that they need more education on ETF liquidity. Recent market volatility highlighted the need to understand how these products react in certain market conditions.

• Advisors want more alternative and fixed-income ETFs Alternative and international fixed income remain the top asset classes where advisors would like to see more ETFs.

• ETF sponsor brand trumps index brand 56% felt that the index brand was less important than the ETF issuer’s brand.

EUROPEAN HIGHLIGHTS

• Appetite for more ETFs is strong 98% of respondents intend to maintain or increase their allocation of ETFs in the next year.

• TER is vitally important Respondents rank TER as the most important factor when selecting an ETF.

• Lack of education is slowing growth ETF education is the No. 1 factor holding respondents back from increasing their ETF investments.

• Smart beta is on the rise 66% of respondents plan to increase or maintain their exposure to smart beta ETFs in the next 12 months.

• ETFs are gaining credibility in Europe Half the respondents believe ETFs and mutual funds can complement one another in the same portfolio.

3

TABLE OF CONTENTS

US SURVEY

Demographics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

ETF Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

New ETFs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Active ETFs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Currency-Hedged ETFs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Smart Beta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Importance of Indexes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Practice Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

EUROPEAN SURVEY

Demographics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

ETF Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

New ETFs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Smart Beta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Active ETFs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Platforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Investor Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Future Investment Opportunities . . . . . . . . . . . . . . . . . . . . . . . . 30

Respondents ranked TER as the most important factor when selecting an ETF

TER IS OF VITAL IMPORTANCE

98% intend to maintain or increase their allocation of ETFs over the next 12 months

LE TOUR D’ETFThe ETF landscape looks bright in Europe. Although there are

hurdles on the horizon, ETFs are poised for growth.

Brown Brothers Harriman, in partnership with ETF.com and Deutsche Asset & Wealth Management, surveyed 123 investors to

identify emerging trends in the European ETF market.

TRACKINGDIFFERENCE

TER

invest in both mutual funds and ETFs to serve as

complements in their portfolios

50%

66% plan to increase or maintain their exposure to smart beta ETFs in the next year

Smart beta is on the rise

Nearly half of all respondents did not receive calls from ETF sales people in a given month

ROADBLOCKS TO ETF ADOPTION INCLUDE:

68%are willing to

invest in an ETF with a track record

of 1 year or less

Lack of ETF education Platform infrastructure issues

Contact Brown Brothers Harriman for a full report of our findings: andrew.craswell@bbh.com.

This publication is provided by Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) to recipients, who are classified as Professional Clients or Eligible Counterparties if in the European Economic Area (“EEA”), solely for informational purposes. This does not constitute legal, tax or investment advice and is not intended as an offer to sell or a solicitation to buy securities or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code or for promotion, marketing or recommendation to third parties. This information has been obtained from sources believed to be reliable that are available upon request. This material does not comprise an offer of services. Any opinions expressed are subject to change without notice. Unauthorized use or distribution without the prior written permission of BBH is prohibited. This publication is approved for distribution in member states of the EEA by Brown Brothers Harriman Investor Services Limited (BBH ISL), authorized and regulated by the Financial Conduct Authority. BBH, Infomediary, InfoFX, ActionWorld and WorldView are service marks of Brown Brothers Harriman & Co., registered in the United States and other countries. InfoSettle is a service mark of Brown Brothers Harriman & Co. © Brown Brothers Harriman & Co. 2015. All rights reserved. September 2015. IS-2015-09-08-1233

Source: ETF.com European Investor Survey sponsored by Brown Brothers Harriman and Deutsche Asset & Wealth Management, September 2015

MU

TUAL FU

NDS

ETF

Want to see more

alternative asset class

ETFs

1TRACKINGERROR

23

The ETF landscape looks bright in Europe. Although there are hurdles on the horizon, ETFs are poised for growth.

Visit www.bbh.com to explore the European ETF landscape with our new infographic, Le Tour d’ETF.

Breaking patterns with smart-beta, alternative, active and currency-hedged ETFs.

Visit www.bbh.com to explore the US ETF landscape with our new infographic.

ETF Innovation

ETF.com4

DEMOGRAPHICS

1. Please indicate the percentage of your AUM invested in ETFs/ETNs:

ETFs continue to increase in popularity. The percentage of advisors with more than 50% of their AUM invested in ETFs and ETNs increased by 21% since 2013.

The number of advisors who have more than 90% of their AUM in ETFs has more than doubled in the past three years from 6% to 14%.

21%

13%11%

6%5%

3%4%

3% 3%

6%

25%

19%

13%

10%9%

7%

5% 5%6%

8% 8%

11%13% 13% 13%

11%

7%

5% 5%

9%

7%

14%

3%

0%

5%

10%

15%

20%

25%

30%

0-10% 11-20% 21-30% 31-40% 41-50% 51-60% 61-70% 71-80% 81-90% 91-100% I don't manageinvestments.

2013

2014

2015

2. On average, how many ETFs are held in your portfolios?

3%

30%

34%

26%

7%0

1 to 5

6 to 10

11 to 20

20+

The largest number of respondents have between 6 to 10 ETFs in their portfolios.

3. Across all your accounts, on average, how many trades per month are you doing in one client account?

8%

73%

12%4%

3%

0

1 to 5

6 to 10

11 to 20

20+

On a monthly basis, advisors are making very few trades in a client’s account. 73% of respondents make between 1 and 5 trades in a client account on average.

This may place a greater importance on long term holding costs, such as expense ratio as opposed to trading costs (i.e. commissions and spreads).

US SURVEY RESULTS AND FINDINGSIn our third-annual US Advisor Survey we were overwhelmed by responses from 250 financial advisors. While the US ETF market is predominantly traditional passive products, it is clear that the new wave of growth will come from smart beta and active ETFs as advi-sors look for lower cost products to provide enhanced returns, diversification, and lower risk.

5

6. How much of a concern is liquidity in bond ETFs for you?

11%

52%

29%

8%

The most important concern

An important concern

A somewhat important concern

Not a concern at all

For 63% of respondents, liquidity in bond ETFs is an important concern. This is not surprising because recent market volatility high-lighted how these products may react in certain market conditions.

4. Which of the following top ETF sponsors have the strongest brand for delivering high-quality ETFs? (Select 3)

79%

52%

60%

19%23%

8% 7%

85%

62%

48%

23% 25%

14%10%

89%

64%

53%

28% 27%

19%

11%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

BlackRock's iShares Vanguard State Street GlobalAdvisors

WisdomTree Invesco PowerShares First Trust Charles Schwab

2013

2014

2015

ETF SELECTION

One of the major objectives of this survey was to find out how investors choose ETFs. To identify the most important factors in their ETF selection process, we asked:

5. Rank the following in terms of importance in selecting an ETF (assuming they target the same general area of the market).

1 2 3 4 5 6 7

ETF issuer 10.6 11.0 10.2 17.0 15.2 18.7 17.3

Exact exposure of the underlying index

46.3 11.0 11.7 9.2 8.1 8.5 5.3

Expense ratio 20.1 31.8 21.9 11.3 7.1 4.9 2.8

Tracking difference 6.0 20.5 17.3 19.4 15.5 13.4 7.8

Historical perfor-mance

10.6 10.6 12.4 12.7 13.8 12.4 27.6

Trading spreads 4.2 8.5 17.3 19.1 23.3 17.3 10.2

Tax efficiency 2.1 6.7 8.8 11.7 17.0 24.7 29.0

The largest number of respondents ranked exact exposure of the underlying index as the most important factor when selecting an ETF, followed by expense ratio.

Tax efficiency does not seem to be important to advisors.

7. What impact does commission-free trading of ETFs have on your decision-making?

2013

2014

2015

29%

48%

18%

6%

31%

50%

16%

4%

38% 39%

17%

6%

0%

10%

20%

30%

40%

50%

60%

No impact: I don’t consider it

Moderate impact: It’s one of many factors I consider

Significant impact: It significantly influences my

decision-making process

Enormous impact: I only buy commission-free ETFs

This year 77% of respondents said that commission-free trading had a moderate to no impact on their ETF trading decisions.

This is surprising given the number of sponsors/brokerage plaforms that offer commission-free ETFs.

8. In a low rate environment, where do you look for income? (Check all that apply)

0% 10% 20% 30% 40% 50% 60% 70% 80%

Infrastructure

Other (please specify)

Foreign fixed income

Investment-grade or government-issued debt

MLPs

High-yield debt

REITs

Dividend-paying stocks

12%

12%

32%

44%

47%

47%

56%

74%

ETF.com6

9. How soon after a new ETF launches will you consider adding it to your portfolio?

2013

2014

2015

17%

9%

26%

32%

5%

11%

18%

14%

33%

25%

4%5%

14%

11%

35%

29%

6% 5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Immediately 1-3 months 3 months - 1 year 1 year - 3 years After 3 years I never buy newETFs

60% of advisors are willing to invest in an ETF with a track record of 1 year or less.

Similar results were found in our 2015 European Investor Survey where 68% of respondents were willing to invest in an ETF with a track record of 1 year or less.

NEW ETFs

With a record number of new ETFs launched in the US by the end of Q3 2015, we wanted to examine investor attitudes toward new ETFs. We were curious to learn if advisors are overwhelmed by the number of choices or if they welcome new products. We asked:

7

10. When considering a new ETF, if it employs securities lending, do you see this as a net positive (due to increased performance through better tracking to the underlying index) or a net negative (due to concerns related to counterparty risk, given the securities are on loan)?

Net negative

Net positive

No opinion / I don’t know

29%

34%

37% 34% of respondents consider ETFs that employ securities lending to be a positive while 29% see it as a negative due to concerns related to counterparty risk.

The remaining 37% of respondents did not have an opinion on this topic which could indicate a lack of transparency on which ETFs perform securities lending and the need for education around the risk and impact securities lending can have on performance.

11. What is the minimum AUM you’d like to see in a new ETF before considering it?

5%

20%

39%

32%

4%4%

21%

37%35%

4%5%

17%

35%37%

6%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0 $10 million $50 million $100 million $1 billion

2013

2014

2015

57% of the respondents will invest in an ETF with an AUM of $50 million or less.

These results have remained consistent over the past three years and indicate how important it is for new ETFs to reach a critical size in order to be considered by the vast majority of investors.

12. Assuming a $50 share price, what is the minimum average daily volume you’d like to see in a new ETF before considering it?

5%10%

46%

34%

5%4%

11%

44%

35%

5%5%7%

49%

31%

8%

0%

10%

20%

30%

40%

50%

60%

0 shares per day

1,000 shares per day

10,000 shares per day

100,000 shares per day

1 million shares per day

2013

2014

2015

ETF.com8

14. What areas of the market do you think could use more ETFs? (Choice of asset classes)

33%

4%

16%

14%

23%

15%

14%

36%

21%

0% 5% 10% 15% 20% 25% 30% 35% 40%

There are too many ETFs already

U.S. equity

International equity

U.S. fixed income

International fixed income

Commodities

Currencies

Alternatives

Currency-hedged

Alternative, international fixed income, and currency-hedged remain the top asset classes where advisors would like to see more ETFs.

33% of respondents selected “There are too many ETFs already”. This option has increased by 21% in the past two years demonstrating the breadth and depth of the ETF products in the market, making it harder to differentiate new products.

9

13. How likely is it you will purchase “alternative” ETFs in the next 12 months? (Alternative, for the purposes of this study, includes hedge fund replication, long/short, 130/30 and managed futures strategies.)

When asked about alternative ETFs the results were mixed. Al-most 30% of respondents indicated that they were likely or very likely to purchase an alternative ETF in the next year.

While 35% of respondents have no intention of purchsing an alternative ETF.

11%

18%

36%

35% Very Likely

Likely

Maybe

No Chance

ETF.com10

ACTIVE ETFs

There has been plenty of buzz surrounding actively managed ETFs, but they have been slow to attract AUM. With $21.8 billion in AUM, actively managed ETFs make up less than one percent of the total ETF market.1

With the launch of nontransparent ETFs on the horizon, we wanted to gauge advisors’ sentiment toward actively managed ETFs, so we asked:

15. In what asset class would you be most likely to look for an actively managed ETF?

16. What is the most important factor you use when evaluating an actively managed fund (excluding investment strategy)?

For 55% of respondents, either emerging markets equity or fixed income are the top two areas of interest for actively managed ETFs.

Performance history and reputation of the portfolio manager were the most important factors to consider when evaluating an actively managed fund.

The requirements for transparency and low expense ratios are less relevant for active ETFs than for passive ETFs.

14%

8%

26%29%

12%

11% U.S. equity

International developed markets equity

Emerging markets equity

Fixed income

Commodities

Other

6%6%

25%

4%27%

6%

26%

Degree of transparency

Expense ratio

Other (please specify)

N/A: I don’t buy actively managed ETFs

Performance history

Reputation of the firm offering the fund

Reputation of the portfoliomanager

17. How much track record must an actively managed fund or active ETF have before you would consider buying it?

2015 2014

None 5% 6%

1 to 11 months 14% 12%

12 to 24 months 27% 27%

25 to 36 months 13% 19%

More than 3 years 20% 21%

N/A: I don’t buy actively managed ETFs

21% 15%

Only 20% need an active fund or active ETF to have a track record of over 3 years.

The figures have not changed much this year and indicate that growth of active ETFs will continue to be slow.

1 AdvisorShares Active ETFs Update as of 10/30/2015

11

18. Currently, actively managed ETFs must disclose their holdings every day. Some people think that’s great; others worry it tips the manager’s hand. Suppose a talented active manager were deciding to launch a new strategy. Would you rather buy that strategy as:

When asked to choose between transparency and protection from front-running, 53% of respondents preferred an active ETF that disclosed holdings daily.

56%

47%

53%

44%

53%

47%

0%

10%

20%

30%

40%

50%

60%

2013 2014 2015

An actively managed ETF that discloses its holdings each day, thus providing increased transparency, but reducing protection from front-running.

An actively managed ETF that only disclosesits holdings quarterly, with a 30-day lag (like mutual funds), thus providing increased protection from front-running, but reducing transparency.

ETF.com12

CURRENCY-HEDGED ETFs

Approximately one out of every five ETFs launched in 2015 were currency-hedged. ETF sponsors have offered clients both hedged and unhedged share classes. We wanted to learn more about advisors’ attitudes toward currency-hedged ETFs, so we asked:

19. Have you purchased a currency-hedged ETF in the last 12 months?

20. How likely is it you will purchase a currency-hedged ETF in the next 12 months?

46% of respondents indicated that they had purchased a currency-hedged ETF in the past year.

When asked if they will purchase currency-hedged ETFs in the next year, only 20% of respondents indicated there is no chance of them purchasing one.

46%

54%

Yes

No

16%

18%

46%

20%

Very Likely

Likely

Maybe

No Chance

21. What percentage of your international equity investments is currency-hedged?

70% of respondents currency hedge less than 25% of their international equity investments.

Currency-hedged ETFs are still relatively new products and we can anticipate their growth to continue.

35%

35%

17%

8%

5%

0%

1 to 25%

26 to 50%

51 to 75%

76 to 100%

0% 5% 10% 15% 20% 25% 30% 35% 40%

13

22. Which of the following strategies do you consider to be “smart beta”? (Check all that apply)

23. Did you buy a smart-beta ETF (however you define it) in the past year?

The survey results identified an 8% increase in the number of respondents who bought a smart-beta ETF in the past year.

24. What share of smart-beta products currently make up your AUM?

Despite the increase in the number of respondents who bought a smart beta ETF in the past year, smart beta still represents less than 5% of AUM for more than half of respondents.

SMART BETA

50%

49%

43%

41%

38%

25%

16%

5%

0%

0%

0% 10% 20% 30% 40% 50% 60%

Low volatility

Fundamental indexing

Equal weighting

Any strategy that is not cap-weighted

Quality

Dividend

Currency hedging

I am not familiar with smart beta

Growth

Small-cap/Large-cap

49% 51%

57%

43%

0%

10%

20%

30%

40%

50%

60%

70%

Yes No

2014

2015

57%

11%15%

17%

55%

21%

9%

15%

0%

10%

20%

30%

40%

50%

60%

Less than 5% 5-10% 11-20% Greater than20%

2014

2015

With its recent rise to popularity as the next evolution of investing, “smart beta” has been one of the hottest topics in the ETF space during the last few years. Smart beta is a hybrid between passive and active management and offers investors the transparency of an in-dex with the potential to lower risk, diversify, and outperform the market. We wanted to learn more about investor attitudes toward smart beta, so we asked:

ETF.com14

25. Do you plan to increase/decrease your exposure to smart beta in the next year?

26. If you bought a smart beta ETF, which of the following did you do with it in your asset allocation?

99% of respondents plan to maintain or increase their exposure to smart beta over the next year.

32% are using smart beta to replace a plain-vanilla index fund and 13% are using it to replace an active fund.

1%

36%

63%

Decrease

Increase

Stay The Same

31%

9%

32%

8%

13%

7%

Did not purchase a smart-betaETF

None of the above

Replaced a plain-vanilla indexfund

Replaced a satellite alpha-seekingposition

Replaced an active fund

Used incoming investment dollars to establish a new position

27. Which of the following ETF strategies are you considering using for equity exposure (check all that apply):

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Fundamental weighting

Equal weighting

Minimum volatility

Currency-hedged exposure

Active management

Liquid alternatives

Quality

None of the above

48%

44%

36%

33%

33%

26%

29%

11%

15

IMPORTANCE OF INDEXES

As ETF sponsors continue to build their brands, we wanted to know if this diminishes the importance of index provider brands, so we asked:

28. What is the impact of index brand when choosing an ETF?

29. Suppose you have two ETFs that focus on emerging markets. One ETF tracks an index from a major index provider like MSCI/S&P/FTSE and charges 0.50%; another tracks an index from a company you’ve never heard of and charges 0.40%. They seem to offer similar expo-sure, and are issued by the same ETF sponsor. Which would you buy?

We saw a shift in the trend here. Last year, more than half of all respondents said that index brand was of equal or greater importance to the ETF issuer’s brand.

This year, however, 56% felt that the index brand was less important than the ETF issuer’s brand or doesn’t matter at all.

As active and smart beta ETFs become more popular, we may see an even further decline in index brand importance since investors are willing to pay for the intellectual capital of the manager instead of the index.

Advisors are willing to pay extra to have a well-known index brand name.

While index brand has always outweighed the lower-cost option. Last year we saw a slight increase in the number of advisors willing to bet on a low-recognition index.

This year the numbers shifted back and 66% of respondents felt that the index provider was more important than a fee that is ten basis points lower.

13%

43%

32%

12%

Not important: The index brand doesn’t matter to me at all.

Somewhat important: The index brand is less important than the ETF issuer’s brand, but it still matters

Important: The index brand is of equal importance to the ETF issuer’s brand

Very important: The index brand is moreimportant than the ETF issuer’s brand

37%

63%

41%

59%

34%

66%

0%

10%

20%

30%

40%

50%

60%

70%

The 0.40% expense ratio ETF linked to the “no-name” index

The 0.50% expense ratio ETF linked to a major index

2013

2014

2015

PRACTICE MANAGEMENT

As advisors’ familiarity with ETFs continues to grow, we wanted to know more about where they go for more information, so we asked:

64%

55%

51%

39%

36%

29%

9%

0% 10% 20% 30% 40% 50% 60% 70%

Product information

Returns data and related information

Educational pieces on specific areas of the market

Broad-market commentary

Trading and liquidity support

Model portfolios

I don’t need any support

30. What are the top 3 places you search for information on ETFs? (Please choose 3)

% of Respondents

ETF.com 72

Issuer websites, blogs or fact sheets 67

Morningstar 66

Bloomberg 31

ETFdb.com 18

Other (please specify) 13

Wall Street Journal 10

ETFTrends.com 9

MarketWatch 8

S&P Capital IQ 7

XTF 1

32. What ETF sponsor has the best-informed/most useful salespeople?

34%32%

20%

12% 13%11% 9%9%

3%

8%

14%

7% 6%2%2% 2%2% 1%1% 1%1% 1%1%

0%5%

10%15%20%25%30%35%40%

Blac

kRoc

k’s

iSha

res

Char

les

Schw

ab

Firs

t Tru

st

Gugg

enhe

im

Inve

sco

Pow

erSh

ares

Othe

r (pl

ease

spe

cify

)

PIM

CO

ProS

hare

s

Stat

e St

reet

SPD

Rs

Van

Eck

Vang

uard

Wis

dom

Tree

2014

2015

31. What sort of support do you like to receive from ETF issuers (check all that apply)?

ETF.com16

9%

0% 10% 20% 30% 40% 50% 60%

Very Likely

Likely

Maybe

N/A

No Chance

1%

5%

15%

28%

51%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Manage all your assets yourself

Use an ETF strategist for all ofyour clients’ portfolios

Use an ETF strategist for some of your clients’ portfolios 17%

7%

76%

By far, track record is the most important quality to advisors when selecting an ETF strategist.

59% of respondents indicated liquidity is an area in which they need more education.

33. How likely are you to leave your broker-dealer or wire house in the next 12 months?

34. ETF strategists—defined as firms that provide model portfolios or outsourced ETF-focused asset allocation strategies to other advisors—have emerged as a major source of growth for ETF products over the past few years. Do you…?

17

35. How do you select an ETF strategist? Please rank 1 = most important

1 2 3 4

Track record 51% 24% 9% 17%

Brand/company affiliation 17% 24% 24% 34%

Evaluate the individual manager

33% 32% 17% 18%

Breadth of product offering 11% 20% 28% 41%

36. On a general basis, what ETF product benefits would you like to learn more about?

41%

59%

25%

10%

0%

10%

20%

30%

40%

50%

60%

70%

Taxation Liquidity Expenses Other

EUROPEAN SURVEY RESULTS AND FINDINGSDrawing upon the valuable insights gained from our annual US Advisor Survey, we have partnered with ETF.com and Deutsche Asset & Wealth Management to bring you the first European Investor Survey, which gauges the market sentiment of ETF-focused financial advisers and institutional investors.

Our findings confirmed investors’ growing appetite for ETFs, shed light on shifting investor sentiments, and provided insight on emerg-ing areas of ETFs, such as new ETFs, active ETFs, currency-hedged ETFs, and smart beta. The results are clear: ETFs are becoming increasingly popular across a broad spectrum of European investors, and Europe’s ETF marketplace is beginning to align more closely with that of the more established US ETF market.

1. Which classification best describes your business?

Independent Financial Advisers made up more than 60% of survey respondents, with almost half of which have at least €100 million in assets under management (AUM).

DEMOGRAPHICS

62%

10%

20%

30%

40%

50%

60%

70%

I am affiliatedwith an

insurancecompany

0%

18%

7% 6%4%

2% 1%

I am an independent

financial advisor/planner

I am amutual fund

manager

I am ahedge fund

manager

I am affiliatedwith a

private bank

I am affiliatedwith a

retail bank

I am affiliatedwith a

pension fund

2. What percentage of your fund’s AUM or your investable assets do you currently hold in ETFs?

15%

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

45%

16%12%

9%

3%

0 1-10% 11-25% 26-50% 51-99% 100%

For 60% of respondents, ETFs make up 0-10% of their AUM.

Our 2014 US Advisor Survey revealed that 70% of respondents have more than 10% of their AUM invested in ETFs. This reflects the maturity of the US ETF market and the difference in ETF holdings could indicate the potential growth for ETFs in Europe.

ETF.com18

3. Which of the following best describes your outlook?

27% I prefer ETFs over mutual funds

I prefer mutual funds over ETFs

ETFs and mutual funds complement one another in my portfolio

23%

50%

50% of respondents use ETFs and mutual funds to complement one another in their portfolios.

This result is not surprising. ETFs are a great allocation tool in a multi-asset portfolio, given their flexibility and low-cost.

ETFs are increasingly being used in multi-asset funds, which have experienced strong asset flows in 2015. This trend shows that there is a place for both mutual fund and ETF structures in client portfolios.

5. Do you plan to increase or decrease the percentage of assets invested in ETFs in the next 12 months?

62% 36%

2%

Increase

Decrease

Stay the Same

98% of respondents plan to increase or maintain their portfolio allocation to ETFs in the next 12 months.

This is a reflection of the hard work carried out by ETF issuers and the industry to promote the benefits of ETFs to all investor types.

4. What kind of ETFs do you or your clients own? (Check all that apply)

85%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Currency0%

57%

37%34%

20%

16%13%

Equity Fixed Income Commodity Smart beta or Non-Market

Cap Weighted

Alternatives Active ETFs

Equity ETFs are currently the most popular asset class among investors. However, fixed-income ETFs have started to gain traction and have enjoyed strong flows in 2015.

Currency and active ETFs are evolving in Europe. Therefore, it is not surprising that they have relatively low levels of adoption.

6. What factors deter you most from increasing your overall use of ETFs? (Rank the top 5)

Ranked 1-3

Platform issues: My platform doesn’t make trading ETFs easy/economical

74%

Education: I don’t feel I fully understand ETFs 72%

Research: I don’t know how to pick the best ETF 69%

Trading costs: Spreads are too wide and uncertain 65%

I don’t need intraday liquidity 64%

Other 62%

ETFs do not offer enough flexibility outside of mainstream, core indices

54%

Despite tremendous efforts by the industry to provide ETF education, a sizeable number of respondents feel that a lack of education will deter them from using ETFs.

Although platform issues are also seen as a hinderance, many respondents indicate later in the survey that they would not consider changing platforms.

19

ETF SELECTION

7. Please rank the following factors in terms of importance for your ETF selection process from most important to least important:

Ranked 1-3

TER 61%

Tracking difference 46%

Tracking error 39%

ETF issuer 37%

Bid/ask spreads 26%

Replication method 25%

Product diversity 23%

Sales service 23%

On-screen liquidity 19%

Other 19%

Reporting 16%

8. Do you think there are enough currency-hedged ETFs available in Europe today?

9. Please rank deciding factors on ETF liquidity from very important to not so important:

Respondents rank TER as the most important factor with regards to ETF selection.

It is important to note that a fund might have a low TER, but may not be tracking the index, which could have a negative impact on overall portfolio performance. Therefore, investors should not soley focus on the lowest priced product.

The on-screen liquidity and bid/ask spread ranked relatively low, yet these are important considerations when selecting an ETF as they have an impact on the total cost of buying or selling an ETF along with the TER.

Only 10% of respondents thought that there were enough currency hedged products available in Europe today. However, currency hedging could become a powerful distribution tool in Europe, given the fragmented nature of the market and multitude of currencies traded across the region.

Surprisingly, 51% of respondents have no opinion. This poten-tially reflects a lack of awareness about the impact of currency fluctuations on performance.

Liquidity of the underlying market was the top-ranked factor, which indicates an increasing understanding of the ETF market mechanics.

Fund size also ranks highly in the ETF selection criteria, which is consistent with mutual fund selection criteria.

Very important Important Not so important

Fund size 44% 45% 11%

Average traded volumes per day, week, month, and year 32% 43% 25%

Average frequency of trades on exchange 16% 42% 42%

The bid/offer spread 44% 52% 4%

The liquidity of the underlying market 65% 33% 2%

Number of authorised participants that work with ETF issuer 20% 52% 28%

Other 4% 11% 85%

ETF.com20

A major objective of this survey was to find out how investors choose ETFs. In order to identify the most important factors in their ETF selection process, we asked:

39%51%

Yes

No opinion

No

10%

10. Is UCITS compliance an important factor when selecting an ETF?

14%Yes

No

No opinion

15%

71%

More than 70% of respondents view UCITS compliance as an important factor when selecting an ETF.

Now that UCITS ETFs are starting to gain traction and liquidity, assets may be reallocated from US-listed ETFs to comparable Eu-ropean products. Also, depending on the investor, UCITS ETFs could offer greater tax efficiency.

11. Which is your preferable ETF structure?

3%

62%

35%

Physical replication

No preference

Synthetic replication

62% of respondents prefer physical replication, which reflects the trend in the market where many issuers are moving to physi-cal replication.

A relatively large proportion of respondents have no opinion, indicating that the replication method is not always of critical importance.

12. Is the country of domicile a factor when selecting an ETF or ETP? If so, which is your domicile of preference?

20%

21%

33%

20% 6%0%

Country of domicile is not a factor

Ireland

Home domicile (e.g. France, Germany)

U.S.

No opinion

Luxembourg

20% of respondents do not view country of domicile as a factor when selecting an ETF.

33% had no opinion, which reaffirms that country of domicile is not viewed as an important factor when selecting an ETF.

Ireland ranked at the top, which is unsurprising given a signifi-cant proportion of ETFs are established in Ireland.

13. Which is your preference regarding the replication methods used for fixed-income ETFs?

52%

29%

Fully physical

3% 16%

Unfunded swap

Sampled physical

Fully funded swapreplication

Again, this result points to a preference for physical replication which is often considered easier to understand.

21

14. What is the impact of index brand when choosing an ETF?

43%

33%

Very Important: The index brand is more important than the ETF issuer’s brand11%

Somewhat Important: The index brand is less important than the ETF issuer’s brand, but it still matters

Important: The index brand is of equal importance to the ETF issuer’s brand

Not Important: The index brand doesn’t matter to me at all

13%

Respondents were almost evenly split when it came to the importance of index brand. More than half of all respondents said that index brand was of equal or greater importance to the ETF issuer’s brand. However, 44% said index brand was less important or not important at all.

15. Which of the following top index providers do you trust the most to deliver a high quality product? (Rank the top 5)

Ranked 1-3

FTSE 85%

MSCI 71%

S&P Dow Jones 68%

FTSE RAFI 65%

Markit 57%

STOXX 55%

Solactive 50%

Morningstar 49%

Barclays 48%

EDHEC 45%

iBoxx 41%

Russell 31%

Nasdaq 23%

ETF.com22

NEW ETFs

16. How soon after an ETF launches would you consider adding it to your portfolio?

15%

10%

43%

23%

9%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Immediately 1-3 months 4 months to1 year

2-3 years After 3 years

43% of respondents will wait 4-12 months before adding a new ETF to their portfolio.

Only 9% will wait three years.

68% of respondents will invest in an ETF with a track record of one year or less. Similar results were found in the 2014 Annual US Advisor survey, where 65% of respondents were willing to invest in an ETF with a track record of one year or less.

18. What is the minimum AUM you’d like to see in a new ETF before considering it?

63% of respondents will only invest in an ETF with €50 million or more in AUM. This indicates that seed capital is an important con-sideration when launching an ETF.

17. What new ETFs in terms of asset class do you want to see in the market? (Check all that apply)

8%

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

32%

28%

50%

46%

22%

Equity Fixed Income Commodities Alternatives Multi-asset Other

Respondents want to see more multi-asset and alternative-asset class ETFs. We have started to see multi-asset indexes come to the European market.

Alternative asset classes are becoming more popular with in-vestors as they seek diversification and non-correlated returns. However, product development may prove challenging to imple-ment in an ETF wrapper.

As ETFs continue to gain traction, we wanted to examine investor attitudes toward new ETFs. In the US, new ETFs have had trouble attracting investors. We wanted to see if the same is true in Europe.

4%

40%

35%

30%

25%

20%

15%

10%

5%

0%

20%

24%

34%

5%

13%

€0 €10 million €50 million €100 million €1 billion Asset level not important

23

19. What share of your total AUM do smart beta ETFs represent?

For 85% of respondents, smart beta ETFs represent less than 5% of total AUM.

We have seen that investors want to see an established performance track record, generally of three years, before they are willing to invest. As smart beta is relatively new to the European market, smart beta strategies will need to establish a track record and then they will be well positioned for growth.

SMART BETA

42%43%

7%

4%2% 2%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0 Less than 5% 5-10% 11-20% 21-50% 50%+

20. Do you plan to increase or decrease your exposure to smart beta ETFs in the next year?

66% of respondents plan to increase or maintain their allocation to smart beta in the next 12 months.

As advisers become more comfortable with ETFs, the adoption and growth of smart beta products is likely to increase.

With its recent rise to popularity as the next evolution of investing, smart beta has become one of the hottest topics in the ETF space. Smart beta offers investors a middle ground between passive and active, along with the benefits of broad market exposure, diversifica-tion, transparency, and low cost. At the same time, it offers the potential to either outperform a market cap index, or pursue a strategy that is lower in volatility or geared more towards income. Smart beta can give an investor exposure to those active trades, with the key benefits of a passive strategy. We wanted to learn more about investor attitudes toward smart betas.

41%

25%

34%Increase

Stay the same

Decrease

Don’t Know

0%

ETF.com24

22. Which of the following smart beta strategies are you using for your equity exposure?

21. What is the greatest potential benefit of smart beta?

22%

33%17%

21%

7%

To deliver less risk than cap-weighted exposure

To deliver higher returns thancap-weighted exposure

The potential for returns thathave low correlations totraditional, cap-weighted returns

Greater diversification

Other

38%

16%14%

12%

8%

5%4%

1% 1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

SizeOtherMomentumValueDividend /income

Fundamental /risk-factor

Minimumvolatility

None of the above

Equal weighting

25

The majority of respondents consider the greatest potential benefit of smart beta to be able to deliver returns higher than market cap indices.

The results suggest that respondents believe smart beta can be used to achieve many different goals.

38% of respondents selected “none of the above” which could indicate an opportunity for smart beta managers to further educate investors and increase adoption.

ACTIVE ETFs

Yes

No

32%

68%

29%

22%

18% 17%

8%

4%2%

0%

5%

10%

15%

20%

25%

30%

Multi-asset strategies

I’m not interested in actively

managed ETFs

Developed market equity

Emerging market equity

Corporate fixed income

Government fixed income

Other

68% of respondents have not purchased an active ETF in the past year. This is not surprising given the limited number of active ETFs available in the market.

It is surprising that 32% stated that they purchased an active ETF in the past year. This may reflect the fact that some smart beta products may be viewed as active.

Multi-asset and developed market equity products ranked highly as potential entrants for active ETF products. This result differs from what we see in the active ETF market today, which is generally geared towards fixed income.

23. Did you buy an active ETF in the past year?

24. What type of active ETF would be most appealing to you?

There has been plenty of buzz surrounding actively managed ETFs, but European investors have been slow to fully embrace the concept. Although the vast majority of actively managed ETFs target the fixed-income space, the approach has gained more of a foothold in other markets. We wanted to find out in which areas advisers would consider actively managed ETFs, so we asked:

ETF.com26

PLATFORMS

Very satisfied

Reasonably satisfied

Somewhat unsatisfied

Unsatisfied

N/A

20%

30%

13%

12%

25%Certain

Likely

Unlikely

Absolutely will not

8%

23%

56%

13%

40%

21% 20% 19%

0%5%

10%15%20%25%30%35%40%45%

My platform does not offer true

intraday trading for ETFs

My platform does not provide enougheducation on ETF product features

Brokerage commissions make

ETFs expensivevs. mutual funds

There is not enoughETF-specific research published on platforms

More than 50% of respondents are satisfied with their platform’s ETF selection and trading capabilities.

25% of respondents selected “not applicable” because they do not need to use a platform.

Although a number of investors state that they want platforms to do more to support ETFs, it is clear that a large proportion of respondents are unlikely to change their platform provider in the next 12 months.

40% of respondents feel that not enough ETF-specific research is published on platforms. This affirms the finding that investors are keen to learn more about ETFs and how they can be implemented into strategies.

25. How satisfied are you with your platform’s selection and trading of ETFs?

26. How likely are you to add or change platforms in the next year?

27. Which of the following do you see as the greatest obstacle for growth of ETFs on fund platforms in Europe?

Fund platforms have become a significant part of the infrastructure that underpins European Mutual Fund industry. As the European ETF market continues to mature, we wanted to know if platform development is keeping up with increasing market demand, so we asked:

27

INVESTOR EDUCATION

Beginner

Intermediate

Experienced

28%

44%

28%

28. How would you rate your level of knowledge when it comes to ETFs?

Only 28% of respondents claim to be experienced users of ETFs.

72% of respondents have a beginner/intermediate level of ETF knowledge, indicating an opportunity for education.

0

1-5

6-10

11-20

21-30

30+

48%

46%

5%

1%0% 0%

29. How many ETF issuer salespeople call you in any given month?

Almost half of all respondents did not receive calls from ETF salespeople in a given month.

ETF.com28

Perhaps the most obvious conclusion to draw from this survey is that investors have a growing appetite for ETFs and are looking for more education on the product features and how they trade. To gauge investors’ confidence about their ETF knowledge and where they go to find information, we asked:

31. What sort of support would you like to receive from ETF issuers? (Check all that apply)

OtherI don’t need any support

Trading andliquidity support

Online seminars and

workshops

Broad marketcommentary

Returns dataand relatedinformation

Access to ETFissuer product

specialists

In-personseminars and

workshops

Educationalpieces on

specific areasof the market

54%

43%37% 38% 34% 31%

25%

16%

4%0%

10%

20%

30%

40%

50%

60%

29

72%

62%58%

43%40%

34%

14%

7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

OtherStock exchanges

Search engines

ETF issuersales people

Platforms’websites

Peers,colleagues, and industry events

ETF issuer andindex websites

Trade publications,newspapers, andmedia websites

30. Where do you find information and education on ETFs? (Check all that apply)

Investors use a variety of sources when researching ETFs.

72% of respondents cited ETF issuer and index websites as their primary source of information.

FUTURE INVESTMENT OPPORTUNITIES

The flexibility of the ETF structure makes it relatively straightforward to launch a new product that meets a specific need of an investor. The results indicate that investors are looking for an even greater diversification of products to meet their specific needs.

49%

39%33% 32% 30%

20%

3%

0%

10%

20%

30%

40%

50%

60%

OtherActive ETFsMulti-assetETFs

Smart betaETFs

Sector-specificETFs (e.g. small

cap, biotech,property)

Fixed-incomeETFs

Core-equity indexETFs (e.g. S&P 500, FTSE 100, Stoxx 50)

32. What ETF strategies would you like to see more of? (Check all that apply)

Core-equity and fixed-income ETFs were low in the ranking and this is not surprising given this sector of the market is becoming increasingly saturated in Europe.

Sector-specific ETFs have been extremely popular in the US market and some issuers have started to bring them to Europe.

ETF.com30

EUROPE Andrew Craswell+44.207.614.3992 andrew.craswell@bbh.com

BBH ETF SERVICES

BBH is a leading provider of asset servicing for the global ETF market. With more than $300 billion in ETF assets under custody and administration, BBH works with a diverse group of asset managers to introduce products both within their own regions and globally. BBH’s expertise in global custody, transfer agency (TA), authorised participant servicing, administration, and accounting services are the foundation for our ETF-specific services.

IF YOU ARE AN:

• Asset manager considering your first ETF launch

• ETF sponsor entering new markets or channels

• Established provider evaluating a new ETF service provider

• Asset manager simply evaluating ETFs as a potential product structure

BBH is your partner. Think of us as your trusted advisers. We help asset managers launch, list, and cross-list ETFs across the globe. We possess the regulatory and local market knowledge, as well as the relationships, to improve your business and enable your future growth.

We look forward to collaborating with you. www.bbh.com/etf

31

GLOBALShawn McNinch+1.617.772.1376shawn.mcninch@bbh.com

ASIAScott McLaren+852.3756.1620 scott.mclaren@bbh.com

EUROPEAntonette Kleiser+353.1.603.6465 antonette.kleiser@bbh.com

This publication is provided by Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) to recipients, who are classified as Professional Clients or Eligible Counterparties if in the European Economic Area (“EEA”), solely for informational purposes. This does not constitute legal, tax or investment advice and is not intended as an offer to sell or a solicitation to buy securities or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code or for promotion, marketing or recommendation to third parties. This information has been obtained from sources believed to be reliable that are available upon request. This material does not comprise an offer of services. Any opinions expressed are subject to change without notice. Unauthorized use or distribu-tion without the prior written permission of BBH is prohibited. This publication is approved for distribution in member states of the EEA by Brown Brothers Harriman Investor Services Limited, authorized and regulated by the Financial Conduct Authority. BBH is a service mark of Brown Brothers Harriman & Co., registered in the United States and other countries. © Brown Brothers Harriman & Co. 2015. All rights reserved. 11/2015.

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