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ETF BASICS: AN INTRODUCTION TO
iSHARES EXCHANGETRADED FUNDS
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Growth of ETFs
The engine of ETFs
Benefits of ETFs and iShares ETFs
Low cost
Tax efficiency
Transparency
Risk management
Liquidity
Modularity and strategies
Agenda
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Consistent growth ofexchange traded funds (ETFs)
ETFs experienced rapid growth during bear and bull markets
There are over 900 U.S. ETFs covering global equity andfixed income with AUM of over U.S. $789 billion.
0
100
200
300
400
500
600
700
800900
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
0
200
400
600
800
1,000
1,200
1,4001,600
U.S. ETF AUM
iShares ETFs
Others
S&P 500
Sources: FRC and Yahoo Finance, as of 12/31/09. Universe includes exchange traded grantor trusts.
AUM
($Billion)
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iShares family of funds and mutualfund markets in net new asset flows
Fund Family 2008Net Flows ($B) 2009Net Flows ($B)
Vanguard 69.2 121.4
PIMCO 23.6 80.4
iShares 54.6 44.2
Franklin Templeton -20.2 18.4
Fidelity -34.6 14.9
T. Rowe Price 2.6 14.8
State Street Global Advisors 67.5 2.8
Dodge & Cox -11.6 -1.3
Oppenheimer -11.3 -3.4
American Funds -16.4 -22.4
Fund families serve different market segments.
Source: Strategic Insight, as of 12/31/09. Excludes funds of funds and money market funds.
Information on American Funds, Vanguard Group, Dodge & Cox, State Street Global Advisors, T. Rowe Price, Dimensional Investment Group,Franklin Templeton Investments, Thornburg and Loomis Sayles is provided strictly for illustrative purposes and should not be deemed an offer
to sell or a solicitation of an offer to buy shares of securities, other than the iShares Funds, that are described in this presentation.
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WHAT IS AN ETF?
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Familiar groundbest of both worlds
Like a stock Trading flexibility intraday on the exchange
Long or short*
Options
Like an index fund
Constructed to track benchmark indexes Low expense ratios
Low turnover
* With short sales, you risk paying more for a security than you received from its sale. Short sales subject to availability.
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What sets an ETF apart?
The creation/redemption process distinguishesETFs from mutual funds and closed-end funds
The creation/redemption process enables theunique benefits of ETFs
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How traditional mutual funds work
Sellers
Buyers
Stock
Exchange
Fund
Company
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The innovative mechanism of iShares ETFs
Mutual funds and iShares Funds are obliged to distribute portfolio gains to shareholders by year-end. These gains may begenerated due to index rebalancing or to meet diversification requirements. Trading shares of the iShares Funds will alsogenerate tax consequences and transaction expenses. Certain traditional mutual funds can be tax efficient as well.
Investor FinancialIntermediary
Stock Exchange
AuthorizedParticipants Fund Company
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iShares ETFs Active Mutual Funds
iShares ETFs seek to track a market
index, before fees and expenses
Most mutual funds are actively
managed, seeking to outperformmarket indexes
Trading Trade on exchanges intraday atmarket price, which may be greateror less than its NAV
Accessed directly through the fundcompany or through a select broker.Pricing generally occurs once a day.
Redemption process Shares not individually redeemed
through the fund
Redeemed through fund company at
end-of-day NAV, less applicable fees
Fees Expense ratio plus transaction costs Expense ratios (typically higher thanindex-linked products2); may chargesales loads or redemption fees
Tax implications Transactions generate taxconsequences for the transacting
shareholder only; obliged to distributegains to all shareholders
Shareholder transactions may generatetax consequences for all shareholders;
obliged to distribute gains toshareholders
Transparency Daily holdings disclosure3 Generally quarterly holdings disclosure
2. Active funds typically charge higher fees than index-linked products due to increased trading and research expensesthat may be incurred
3. In accordance with MSCI licensing, holdings for MSCI-indexed funds are updated monthly.
Accessibility
Costs
Trans-
parency
Strategy
Know the Differences
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The benefits of iShares ETFs
Low cost
Tax efficiency
Transparency
Risk management
Liquidity
Modularity and strategies
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COSTS OF INVESTINGINTERNAL FEES AND TAXES
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Internal expenses matter
$100,000 investment for 10 years 8% annualized return
www.sec.gov/investor/tools/mfcc/fund-label.htmDoes not include commissions or sales charges.
Internal fees $3,862$1,475
$210,556
$7,625$2,930
$14,866$5,778
$215,892gross value
25 bps 50 bps 100 bps
$205,338 $195,249
Foregone earnings
Net value
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iShares Funds low expense ratios
Fund Category bps iShares ETF
Large cap 9
15
iShares S&P 500
iShares Russell 1000
Small cap 20
20
iShares S&P SmallCap 600
iShares Russell 2000
Fixed income 1515
20
iShares Barclays Treasury SeriesiShares iBoxx $ Investment Grade Corporate Bond
iShares Barclays Aggregate & TIPS
International 55-73
35
72
50
iShares MSCI International Series
iShares MSCI EAFE
iShares MSCI Emerging Markets
iShares MSCI Pacific ex-Japan
Sector 4848
iShares Dow Jones SectorsiShares S&P Global Sectors
Transactions in shares of the iShares Funds will result in brokerage commissions.
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Tax efficiency of iShares ETFs
Index funds
Low turnover
Baskets of securities for shares
Creation/redemption process
Capital gain control Shareholders interact via exchange
Taxed as an equity transaction
ETFs can produce capital gain distributions. For example, during an underlying index reconstitution or corporate actions (especially foreign).
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RISK MANAGEMENT
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iShares ETFs are transparent
Manage the unknown know what you own
iShares holdings are published daily on iShares.com*
Pricing of underlying holdings is refreshed continually
No style drift
Each benchmark represents a defined market segment
Benchmark providers publish methodology
Manage risk
iShares ETFs are designed to closely track a benchmark
* In accordance with MSCI licensing, holdings for MSCI-indexed funds are updated monthly.
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Tracking of iShares Funds
Source: BlackRock.
Past tracking performance does not guarantee future performance.
iShares Funds 3-Year AverageAnnual Tracking(as of 12/31/09)
Expense Ratio(as of 1/1/10)
S&P 500 0.01% 0.09%
Russell 2000 0.09% 0.20%
Dow Jones U.S. Total Market 0.16% 0.20%
Dow Jones U.S. Technology 0.53% 0.48%
MSCI Japan 0.38% 0.56%
MSCI EAFE 0.02% 0.35%
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LIQUIDITY
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iShares ETFs offer enhanced liquidity
Liquidity of underlying securities provides foundation for ETF liquidity.Exchange traded attribute provides additional layers of liquidity.
Market participants compete for client orders, leading to tighter spreads.
Investors receive price improvement by transacting in the ETF wheneverthey buy/sell the ETF inside the spread cost of the underlying portfoliobasket of securities.
Trading volume is not indicative of total liquidity in an ETF
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iShares ETF liquidity offers price improvement
Sources: NYSEArca, Bloomberg, as of 12/31/09.
iShares MSCI Emerging Markets (EEM)
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
2004 2005 2006 2007 2008 2009
AnnualSharesTraded(millions)
$0.00
$0.02
$0.04
$0.06
$0.08
$0.10
$0.12
$0.14
$0.16
$0.18
Spre
ad($)
0
5,000
10,000
15,000
20,000
25,000
30,000
2004 2005 2006 2007 2008 2009
AnnualSharesTraded(millions)
$0.00
$0.01
$0.02
$0.03
$0.04
$0.05
Spre
ad($)
EEM Volume
ETF Spread ($)
Current bid/ask spread inunderlying = 7.5 cents.
Current bid/ask spread inunderlying = 6 cents.
iShares Russell 2000 (IWM)
IWM Volume
ETF Spread ($)
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iSHARES MODULAR
FAMILY OF FUNDSA SOLUTIONS-DRIVEN APPROACH
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The benefits of modularity
Building block format
Enables implementation of strategies
Indexing pre-2000 and post-2000
Source: FRC, as of 2/28/07. Universe includes exchange traded grantor trusts.
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Modularity and portfolio completion
U.S. Equity Portfolio
Large CapStocks
S&P 1500
S&P 500S&P 500Growth
S&P 500Value
S&PSmallCap
600
S&P SmallCap600 Growth
S&P SmallCap600 Value
S&PMidCap
400
S&P MidCap400 Growth
S&P MidCap400 Value
For illustrative purposes only.
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Modularity and core/satellite
Portfolio of ActiveFunds or Managers
Small CapGrowth
Large CapGrowth
Large CapValue
Small CapValue
Russell 3000
Russell1000
Russell2000
RussellMidcap
Russell 2000Growth
Russell 2000Value
Russell 1000Growth
Russell 1000
Value
Russell MidcapGrowth
Russell MidcapValue
For illustrative purposes only.
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Modularity and tactical investing
Dow JonesU.S. Total Market
Basic Materials
Consumer Goods
Energy
Financial
Healthcare
Industrial
Technology
Telecom
Utilities
Consumer Services
Utilities ConsumerServices
EnergyTechnology
For illustrative purposes only.
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Modularity and duration management
Barclays Capital 13 Year Treasury
Barclays Capital 710 Year Treasury
Barclays Capital 20+ Year Treasury
iBoxx $ Investment
Grade Corporate Bond
Barclays Capital 13 Year Credit
Barclays Capital Intermediate Credit
iBoxx $ High Yield Corporate
Duration
Yield
For illustrative purposes only.
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Good for clients. Good for business.
Manage costs
Manage risks
Manage taxes
Complementary to your business
Portfolio managers and asset managers
Wealth managers
Consultants and advisors
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Carefully consider the iShares Funds investment
objectives, risk factors and charges and expenses beforeinvesting. This and other information can be found in theFunds prospectuses, which may be obtained by calling
1-800-iShares or by visiting www.iShares.com. Read theprospectuses carefully before investing.
Investing involves risk, including possible loss of principal.
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The information provided is not intended to be a complete analysis of every material fact respecting anystrategy 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.Shares of iShares Funds are bought and sold at market price (not NAV) and are not individuallyredeemed from the Fund.
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. Tradingshares of the iShares Funds will also generate tax consequences and transaction expenses. Certaintraditional mutual funds can be tax efficient as well.
When comparing stocks or bonds and iShares Funds, it should be remembered that management feesassociated with fund investments, like iShares Funds, are not borne by investors in individual stocks orbonds. The annual management fees of iShares Funds may be substantially less than those of mostmutual funds. Buying and selling shares of iShares Funds will result in brokerage commissions, but thesavings from lower annual fees can help offset these costs.
Neither BlackRock Institutional Trust Company, N.A. and its affiliates nor SEI and its affiliates provide taxadvice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot beused by you for the purpose of avoiding tax penalties; (ii) this communication was written to support thepromotion or marketing of the matters addressed herein; and (iii) you should seek advice based on yourparticular circumstances from an independent tax advisor.
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. Indexesare unmanaged and one cannot invest directly in an index. Past performance does not guaranteefuture results.
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The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Cohen & Steers CapitalManagement, Inc., Dow Jones & Company, Inc., European Public Real Estate Association (EPRA),FTSE International Limited (FTSE), FTSE/Xinhua Index Limited (FXI), iBoxx, J.P. Morgan SecuritiesInc., MSCI Inc., Morningstar Inc., The NASDAQ OMX Group, Inc., National Association of Real Estate
Investment Trusts (NAREIT), New York Stock Exchange, Inc., Frank Russell Company, or Standard &Poors, nor are they sponsored, endorsed, or issued by Barclays Capital. None of these companies makeany representation regarding the advisability of investing in the Funds. Neither SEI, nor BlackRockInstitutional Trust Company, N.A., nor any of their affiliates, are affiliated with the companies listed above.
FXI does not make any warranty regarding the FTSE/Xinhua Index. All rights in the FTSE/Xinhua Indexvest in FXI. Neither FTSE nor NAREIT makes any warranty regarding the FTSE NAREIT Real Estate50/Residential/Retail/Mortgage REITs or Industrial/Office Index; all rights vest in NAREIT. Neither FTSEnor NAREIT makes any warranty regarding the FTSE EPRA/NAREIT Global Real Estate ex-US/North
America/Europe/Asia Index; all rights vest in FTSE, NAREIT, and EPRA. All rights in the FTSE Developed
Small Cap ex-North America Index vest in FTSE. "FTSE" is a trade- and servicemark of London StockExchange and The Financial Times Limited; "Xinhua" is a trade- and servicemark of Xinhua FinancialNetwork Limited.
The iShares Funds are distributed by SEI Investments Distribution Co. (SEI). BlackRock Fund Advisors(BFA) serves as the investment advisor to the Funds. BFA is a subsidiary of BlackRock Institutional TrustCompany, N.A., neither of which is affiliated with SEI.
2010 BlackRock Institutional Trust Company, N.A. All rights reserved. iShares is a registered trademarkof BlackRock Institutional Trust Company, N.A. All other trademarks, servicemarks, or registered trade-marks are the property of their respective owners. iS-1944-0110 DB-1562-KM10-1/10
Not FDIC Insured No Bank Guarantee May Lose Value
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For more information, visit
www.iShares.com
1-800-iShares
Get Started Track-based learning
Education Center Watch, listen, get credit
Product Information Holdings, price and return information
Document Library Client presentations and materials
Tools & Charts Portfolio modeling tools and reports
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