Navigating the ETP Landscape: Current Trends, Growth...
Transcript of Navigating the ETP Landscape: Current Trends, Growth...
Navigating the ETP Landscape:
Current Trends, Growth Outlook &
Key Due Diligence Considerations
Dodd Kittsley, Global Head of ETP Research
November 2013
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
2
Non-Market-Cap Weighted Equity ETPs - US Listed
Agenda
2013 ETP Industry Flow Update
BlackRock’s US ETP Industry Growth Forecast
Due Diligence Questions to Consider
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
2013 ETP Industry Trends
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Universe includes all US Listed exchange traded products.
Sources: BlackRock, Bloomberg, as of 10/31/2013.
US ETF Market Growth and Number of Products
4
US ETP Assets & Number of ETPs by Year
71 88 106 157 237 314
433 621 542
794 1,012 1,062
1,350
1,641
95 118 130 134 169
221
381
673
844 925
1,099
1,370 1,445
1,524
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Oct-13
# of ETPs Assets ($bn)
The Diverse US ETF Landscape
5
AUM Market Share AUM by Asset Class
39%
20%
22%
2%
6%
1% 2%
8%
iShares
Vanguard
State Street
ProShares
PowerShares
Van Eck
WisdomTree
Others
81% of the ETF Share Held by the Three Largest
Providers, with iShares® Holding 39% of ETF Assets
ETFs have Enabled Many Asset Classes to
Become Instantly Relevant to a Broader Investor Base
55%
15%
10%
15%
5%
Domestic Equity
Developed International Equity
EM Equity
Fixed Income
Commodity / Other
Universe includes all US-Listed exchange traded products.
Sources: BlackRock, Bloomberg, as of 10/31/2013.
6
Non-Market-Cap Weighted Equity ETPs - US Listed
Equity ETPs Cumulative 2013 YTD Flows: $201.3bn
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Source: BlackRock – ETP Research, Bloomberg. Data as of 10/31/13.
US Equity
Japan Equity
Pan European Equity
Other Developed
EM Equity
7
Non-Market-Cap Weighted Equity ETPs - US Listed
Fixed Income ETPs Cumulative 2013 YTD Flows: $24.8bn
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Source: BlackRock – ETP Research, Bloomberg. Data as of 10/31/13.
8
Non-Market-Cap Weighted Equity ETPs - US Listed
Commodity & Others ETPs Cumulative 2013 YTD Flows: -$31.9bn
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Source: BlackRock – ETP Research, Bloomberg. Data as of 10/31/13.
Others
9
Non-Market-Cap Weighted Equity ETPs - Listed Globally
Non-Market-Cap VS. Market Cap Weighted Equity ETPs
Current Assets (US$bn)
Market Cap Weighted
Non-Market-Cap Weighted
Jan-Oct 2013 Flows (US$bn)
Market Cap Weighted
Non-Market-Cap Weighted
$1,513bn
85%
$277bn
15%
$142.8bn
71% $58.5bn
29%
Source: BlackRock – ETP Research, Bloomberg. Data as of 10/31/13.
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Dividend Income Equity ETPs Listed Globally
10
Dividend Income Equity ETP Monthly Flows (US$bn)
Source: BlackRock – ETP Research, Bloomberg. Data as of 10/31/13.
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Selected Exposures with Recent Momentum
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION 11
% ASSET GROWTH IN SELECTED EXPOSURES: SEP-OCT 2013
0%
10%
20%
30%
40%
PanEuropean
Equity
UK Equity EM Equity JapanEquity
US Equity FloatingRate Bond
High YieldBond
All Others
Market Move Contribution Flows Contribution
$0.9 $7.3 $5.2 $30.7 $2.0 $4.9 $3.0 $13.2
30%
18%
15% 14% 11%
20%
16%
4.1%
Sep-Oct Net
Flows(US$bn)
Source: BlackRock – ETP Research, Bloomberg. Data as of 10/31/13.
Global Equity Flows by Exposure
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION 12
YTD Flows in 2013: $201.3bn (up 72% from $117.0bn YTD 2012)
GLOBAL ETP YTD EQUITY FLOWS BY EXPOSURE
2013 2012
Source: BlackRock – ETP Research, Bloomberg. Data as of 10/31/13.
Listing Region View
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION 13
ASSET GROWTH RATES AND # OF ETPs
(# ETPs)
$1,641
$413 $59
$11
$165
-30
-10
10
30
50
70
90
110
-10% -5% 0% 5% 10% 15% 20% 25% 30%
2013 G
row
th in #
ET
Ps
2013 AUM Growth
US
Europe Canada
Asia Pacific
Latin
America
Bubble
size =
Assets
($bn)
Source: BlackRock – ETP Research, Bloomberg. Data as of 10/31/13.
14
US ETF Trading Volume as a Percentage of Equity Market Volume
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Jan
-08
Ma
r-0
8
Ma
y-0
8
Jul-
08
Se
p-0
8
Nov-0
8
Jan
-09
Ma
r-0
9
Ma
y-0
9
Jul-
09
Se
p-0
9
Nov-0
9
Jan
-10
Ma
r-1
0
Ma
y-1
0
Jul-
10
Se
p-1
0
Nov-1
0
Jan
-11
Ma
r-1
1
Ma
y-1
1
Jul-
11
Se
p-1
1
Nov-1
1
Jan
-12
Ma
r-1
2
Ma
y-1
2
Jul-
12
Se
p-1
2
Nov-1
2
Jan
-13
Ma
r-1
3
Ma
y-1
3
Jul-
13
Se
p-1
3
ETF Volume as % of US Equity Volume
ETF Monthly Trading Volume (US$trillion)
US ETF Trading Volume ETF Volume as % of US Equity Market Volume
Global
Financial
Crisis
Greek Debt
Crisis
US Rating
Downgrade
QE3 to
possibly end
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Source: BlackRock – ETP Research, Bloomberg. Data as of 9/30/13.
ETF vs. underlying market liquidity (Equity)
15
The dollar Average Daily Volume (ADV) of the underlying basket of the top 5 equity iShares ETFs (by AUM) is much
greater than the ETFs, as shown in the upper panel, However, in each case, the bid-ask spread for the ETFs are
significantly lower than the average spreads of the underlying securities.
Source: Blackrock and Bloomberg as of June 17, 2013. Bid-ask spread is the time-weighted intraday spread. Both spreads and ADV are
averaged over the previous 20 days.
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
16
ETF vs. underlying market liquidity (Fixed Income)
The dollar Average Daily Volume (ADV) of the underlying basket of the top 5 corporate iShares ETFs (by AUM) is much
greater than the ETFs, as shown in the upper panel, However, in each case, the bid-ask spread for the ETFs are
significantly lower than the average spreads of the underlying securities.
Source: Blackrock, TRACE, Bloomberg as of May 30, 2013. Bid-ask spread is the time-weighted intraday spread. Both spreads and ADV are
averaged over the previous 20 days
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
US ETP Industry Growth Forecast
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
U.S. ETF growth: The future is incredibly bright
Assets more than doubled over the past 5 years, from 2007 to 2012, in spite of the financial crisis
Momentum has continued in 2013, with year to date flows up 12% year over year and assets growing at an annualized
rate of 20%1
Over the next 5 years, assets could more than double again to $3.5 trillion by 2017
U.S. ETF Assets
As of May 31, 2013. Source: BlackRock and Bloomberg.
(1) As of June 11, 2013.
18
71 88 106 157 237 314 433 621 542
794 1,012 1,062
1,350 1,636
to 3,000
3,500
0
1,000
2,000
3,000
4,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Oct2013
2014 2015 2016 2017Est.
1971
BGI invents
indexing
$ b
illio
ns
1993
State Street
launches 1st ETF
1995
ETF assets
reach 1st $1B
Launch of
1st iShares
ETF
Launch of 1st
Vanguard ETF
Invesco buys
PowerShares
1st commodity
(gold) ETP
launches
Barclays Bank
launches 1st
ETNs
In U.S, 1st year
ETFs inflows
outpace MF
flows
BlackRock buys
BGI & iShares
Launch of 1st
bond ETF by
iShares
Launch of 1st
Schwab ETF &
commission-
free trading
WisdomTree becomes 1st ETF-only
asset manager to trade public
PIMCO launches total
return active ETF
Over 2x growth
in 5 yrs
…and again
over 2x growth
in 5 yrs
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Compared to the market sizes of other investment vehicles, ETFs have a lot of room for growth
There is still huge runway for growth
We’ve only seen the first generation of ETFs
19
1.5
10.2
26.9
57.9
0
10
20
30
40
50
60
70
U.S. ETFs U.S. MutualFunds
Net CreditDerivativesOutstanding
Total U.S.Equity &
DebtSecurites
$ t
rillio
ns
Sources: SimFund, Bank for International Settlements, Bloomberg, SIFMA.
(3) Global OTC CDS notional amounts outstanding.
ETFs as of May 31, 2013. Mutual Funds (excluding money market funds) as of April 30, 2013. Net Credit Derivatives outstanding as of December 31, 2012. Total US Equity and Debt
Securities as of March 31, 2013.
ETFs compete against four types of assets
ETFs Active
Mutual
Funds
Index funds /
separate accounts
Single
security
holdings
Derivatives
Institutional
Retail 3
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Six key drivers of U.S. ETF market growth
20
Reta
il
Ins
titu
tio
na
l In
no
va
tio
n
Growth of the advised market
Increased institutional usage
Fixed Income
Growth of the self-directed market
New products & new segments
Core
exposures
1
2
3
5
6
4
Source: BlackRock.
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Fixed income market penetration is still very low
21
While equity ETFs are ~6% of total equities… fixed income ETFs are 0.6% of the total market
As of March 31, 2013. Source: BlackRock and Bloomberg.
32.7%
5.8%
U.S. Equity
ETFs
U.S. Equity
Mutual Funds
8.4%
0.6%
U.S. Fixed
Income
ETFs
U.S. Fixed
Income
Mutual Funds
Total equity market = $18.6T Total fixed income market = $39.3T
The U.S. fixed income market is more than twice the size of the equity market
However, fixed income ETF penetration is only one-tenth of the level of equity ETF penetration
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Due Diligence Questions to Consider
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Key Criteria for Selecting the Right ETF
23
Manager
Exposure
Structure
Liquidity
Costs
How well do you know your ETF manager?
What’s inside your ETF?
What are the implications of structure?
Can you trade when you need to?
What does it really cost?
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
1. Manager How well do you know your ETF Manager?
24
Expertise in the ETF market
Track record, experience, commitment.
It takes size, skill and expertise to realize ETFs’ benefits for investors.
A business model aligned with your needs
What insights and tools are available to help you navigate ETFs, build portfolios and execute strategies?
• Established in 1988 and public since 1999 ( NYSE: BLK)
• $3.9 trillion assets under management 1
• $2.6 trillion (65%) indexed or iShares 1
• Nearly 10,000 employees; Over 1,600 investment professionals
• Fiduciary model/culture - no proprietary trading
• BlackRock Solutions® oversees $12 trillion in assets
• Financial Markets Advisory Group advises public and private financial institutions
BlackRock facts
Timeline
1971
Index
pioneer
and
innovator
2000
iShares
Exchange
Traded
Funds
2002 2007 2011
Fixed
income
ETFs
iShares iBoxx $
Investment Grade
iShares Barclays Treasury
iShares
iBoxx $
High
Yield
iShares MSCI
Minimum
Volatility
Index Funds
Source: Blackrock, 1BlackRock 4/16/13
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
2. Exposure What’s inside your ETF?
Targeted exposure
Broad or narrow? Depth of coverage?
Overlap or gaps with other index products or active funds?
Index name recognition
Trackable, complete and representative of the investment opportunity?
Industry-standard indexes you want as benchmarks?
Frequency of disclosure and level of transparency
Infrequent disclosure of holdings may expose investors to risk.
25
Index Methodology Impacts Underlying Economic Exposure
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Managing Index Exposure
26
Putting Indexes Together
For illustrative purposes only – market cap spectrum not to scale.
S&P
1500
S&P
Midcap
400
S&P
Small
Cap 600
S&P
500
Russell
1000
Russell
2000
Russell
3000
Russell
Midcap
Russell
Microcap
Russell
200
MSCI
Mid Cap
450
MSCI
Small Cap
1750
MSCI
Large
Cap 300
MSCI
Prime
Cap 750
MSCI
Broad
Market
Index
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Minimum Volatility Exposure
Holdings are subject to change.
Source: Factset as of December 31, 2012.
-2.9% 4.9%
-4.9% -1.2%
5.2% -4.2%
-5.0% -0.7%
3.7% 5.0%
Relative exposure vs. S&P 500
USMV vs. S&P 500
-8.6% 16.7%
-9.2% -5.3%
-0.8% -3.7%
-15.5% -1.1%
-0.1% 27.5%
-20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30%
SPLV vs. S&P 500
Utilities Telecommunications Materials Information technology Industrials
Healthcare Financials Energy Consumer staples Consumer discretionary
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
3. Structure What are the implications of ETF Structure?
Complete and transparent benefits to shareholders
Balancing exposure with cost and tax efficiency and liquidity.
Stand-alone, dedicated ETF structure
Insulation from the activities of other shareholders only happens with this structure.
28
Past performance does not guarantee future results.
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Structure Impacts Risks, Taxes and Tracking Error
29
Open-end
Fund
Unit Investment
Trust
1940 Act 1933 Act
Grantor
Trust
Limited
Partnership
Exchange
Traded Notes
Other Listed
Vehicles
Closed-end
Fund
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
4. Liquidity Can You Trade when You Need to?
Liquidity is like oxygen: You don’t notice it until it’s gone
Credit crisis of 2008 placed a premium on liquid investments and liquid investment vehicles.
Provider support for liquidity
Tight bid / ask spreads in conjunction with deep, liquid markets are ideal for all investors.
30
Bid / ask spread, is the difference between bid / ask prices, which reflect the most current value at which an investor can buy or sell shares of an ETF during market trading hours.
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
ETFs offer access to less liquid markets at low cost
Buying and selling shares of iShares Funds will result in brokerage commissions.
Source: Blackrock and Bloomberg as of June 2013. The values in the chart are yearly averages (except for 2013), while the spread and average daily volume
calculations in the table are 20-day averages as of June 17, 2013.
ETF Spread
(bps)
Basket Spread (bps)
ETF Average Daily Volume ($M)
Underlying Basket ADV ($M)
2.4 33 $3,482 $18,733
31 FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Explicit costs are predetermined based on the ETF’s fees and brokerage firm’s commission schedule. Implicit costs may vary based on market events and trading volume.
Implicit costs may change continuously based on current market conditions.
5. Costs What does it Really Cost?
32
Trading costs
Performance vs. benchmark
(tracking difference)
Taxes on distributions
Expense ratio
Brokerage commission
Implicit Costs Explicit Costs Total Costs
When faced with a choice
among ETFs in a category,
consider all explicit and
implicit costs
+ =
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
iShares ETFs and Mutual Funds: Key Differences
33
1. Both vehicles are obliged to distribute capital gains to all shareholders.
Criteria iShares ETFs Active Mutual Funds
Performance goal Track a benchmark Outperform a benchmark
Management Passive Active
Performance risks
Performance may differ from benchmark.
Holdings not altered during rising /
falling markets.
May not meet performance goal.
May underperform due to manager’s
holdings selection.
Buying / selling shares Intraday on exchanges. Once per day via fund company.
Price to buy / sell Current market price, which may differ from NAV. End-of-day NAV, less fees.
Fees Expense ratio + transaction / brokerage costs. Expense ratio + any sales loads / redemption fees.
Tax impact1 of
buyers / sellers Shareholders only impacted by their own action.
Shareholders may be impacted by all other
shareholders’ actions.
Holdings disclosure Daily Typically quarterly
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Every investor is unique.
That’s why there’s iShares.
Visit iShares.com and Find Out Why 9 of 10 Large Professional Investors Choose iShares for their ETFs1
Professional
Quality
iShares delivers
quality products
that can help you
navigate today’s
volatile markets.
i Individual
Choice
As your partner,
iShares helps you
execute investment
ideas with insights
and support.
i Responsible
Innovation
iShares is an industry
leader in making
investing clear, fair,
and efficient for you.
i
1. 90% of all institutional investors (pensions, foundations and endowments; asset managers; insurance companies and investment advisors) surveyed in 2013 U.S. Exchange Traded
Funds Study by Greenwich Associates used iShares ETFs. Survey included 176 institutional investors already using ETFs, interviewed 2/2013-4/2013.
34 FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Carefully consider the iShares Funds’ investment objectives, risk factors, and charges and expenses
before investing. This and other information can be found in the Funds’ prospectuses, which may be
obtained by calling 1-800-iShares (1-800-474-2737) or by visiting www.iShares.com. Read the
prospectus carefully before investing.
Investing involves risk, including possible loss of principal. Bonds and bond funds will decrease in
value as interest rates rise and are subject to credit risk, which refers to the possibility that the debt
issuers may not be able to make principal and interest payments or may have their debt downgraded
by ratings agencies. High yield securities may be more volatile, be subject to greater levels of credit
or default risk, and may be less liquid and more difficult to sell at an advantageous time or price to
value than higher-rated securities of similar maturity.
In addition to the normal risks associated with investing, international investments may involve risk of capital
loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting
principles or from economic or political instability in other nations. Emerging markets involve heightened
risks related to the same factors as well as increased volatility and lower trading volume. There can be no
assurance that an active trading market for shares of an ETF will develop or be maintained. There is no
guarantee that dividends will be paid.
Investment comparisons are for illustrative purposes only. To better understand the similarities and
differences between investments, including investment objectives, risks, fees and expenses, it is important
to read the products’ prospectuses.
35 FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
The information provided is not intended to be a complete analysis of every material fact respecting any strategy and has been
presented for educational purposes only.
Asset allocation models and diversification do not promise any level of performance or guarantee against loss of principal.
Investment in the Fund is subject to the risks of the underlying funds. There is no guarantee that the Fund will generate high
income.
Shares of iShares Funds are bought and sold at market price (not NAV) and are not individually redeemed from the Fund.
There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.
Mutual funds and iShares Funds are obliged to distribute portfolio gains to shareholders by year-end. These gains may be
generated due to index rebalancing 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.
When comparing stocks or bonds and iShares Funds, it should be remembered that management fees associated with fund
investments, like iShares Funds, are not borne by investors in individual stocks or bonds. The annual management fees of
iShares Funds may be substantially less than those of most mutual funds. Buying and selling shares of iShares Funds will
result in brokerage commissions, but the savings from lower annual fees can help offset these costs.
Index returns are for illustrative purposes only and do not represent actual iShares Fund performance. Index performance
returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest
directly in an index. Past performance does not guarantee future results.
BlackRock does not provide tax advice. Please note that (i) any discussion of US tax matters contained in this communication
cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion
or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an
independent tax advisor.
36 FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).
The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Cohen & Steers Capital Management, Inc.,
European Public Real Estate Association (“EPRA®”), FTSE International Limited (“FTSE”), JPMorgan Chase & Co.,
MSCI, Inc., Markit Indices Limited, Morningstar, Inc., The NASDAQ OMX Group, Inc., National Association of Real Estate
Investment Trusts (“NAREIT”), New York Stock Exchange, Inc., Russell Investment Group, S&P Dow Jones Indices LLC or
Standard & Poor’s, nor are they sponsored, endorsed or issued by Barclays Capital, Inc. None of these companies make any
representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with the companies listed above.
©2013 BlackRock. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock. All other
marks are the property of their respective owners. iS-10604-0913
37
Not FDIC Insured • No Bank Guarantee • May Lose Value
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION