global and european etps: overview, flows, and due diligence stephen cohen head of ishares emea...

Global and European ETPs:Overview, Flows, and Due Diligence

Stephen Cohen Head of iShares EMEA Investment Strategy and Insights

April 2013

For Professional Investors Only

iShares EMEA Investment Strategy and Insights (ISI)For professional clients / qualified investors only

ETP Market Snapshot

ETP Usage

ETP flow recap

Due Diligence

iShares

Outline

ETP Market Snapshot


Global and European ETP landscape

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Global AUM % market share as at end of February 2013

Europe AUM % market share as at end of February 2013

Global ETP and ETF AUM and Count by year

European ETP and ETF AUM and Count by year

Unless otherwise specified, all information is sourced from BlackRock ETP Landscape. Data as at end of February 2013.


Global snapshot

Top 10 providers account for 83% of ETP market share

4,798 ETPs are managed by 182 providers, with $2.037tr of assets under management

iShares is the market leader with 620 ETPs counting for $796 bn of assets under management

Globally there are 3,314 ETFs with $1.85tr of assets under management

Provider *Feb-2013Assets

% Market Share

Feb-2013 Net Flows

# ETPs

iShares 795.7 39.1 4.1 620

State Street 342.1 16.8 (4.3) 176

Vanguard 270.8 13.3 5.0 88

PowerShares 76.8 3.8 (0.8) 193

DB x-trackers 52.6 2.6 0.2 310

Lyxor / Soc Gen 42.5 2.1 (0.2) 210

ETF Securities 28.3 1.4 (0.3) 329

Van Eck Global 26.5 1.3 0.8 55

Nomura Group 25.3 1.2 0.2 43

WisdomTree Investments 23.1 1.1 2.2 47

172 others 353.4 17.3 3.7 2,727

Total 2,037.0 100.0 10.6 4,798

European snapshot

Top 10 providers account for 91.3% of ETP market share

2135 ETPs are managed by 40 providers, with $375.4bn of assets under management

iShares is the market leader with 206 ETPs counting for $145.7bn of assets under management

In Europe there are 1,319 ETFs with $337.7bn of assets under management

Provider *Feb-2013Assets

% Market Share

Feb-2013 Net Flows

# ETPs

iShares 145.7 38.8 1.5 206

DB x-trackers 51.5 13.7 0.2 261

Lyxor/Soc Gen 42.2 11.2 (0.2) 205

ETF Securities 23.5 6.2 (0.4) 304

Credit Suisse 17.4 4.6 (0.2) 58

ZKB 15.1 4.0 (0.3) 9

UBS 14.9 4.0 (0.1) 267

Source Markets 13.3 3.5 0.04 93

Amundi 12.4 3.3 (0.1) 102

Commerzbank 6.6 1.8 0.04 264

30 others 32.8 8.7 0.8 366

Total 375.4 100.0 1.4 2,135

Unless otherwise specified, all information is sourced from BlackRock ETP Landscape. Data as at end of February 2013. *Providers measured at parent company level

Global and European ETP competitive landscape

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ETP Usage


Why are ETPs so popular?

Transparency Investors know the ETF holdings, price, and costs

Liquidity ETFs offer two sources of liquidity:

Primary market and secondary market

Diversification ETFs provide immediate exposure to a basket or group of securities for instant diversification

Broad range of asset classes including equities, bonds, commodities, investment themes, etc

Flexibility ETFs are listed on exchanges and can be traded at any time the market is open

Pricing is continuous throughout the day

Cost effectiveness

ETFs offer a cost-effective route to diversified market exposure

The average Total Expense Ratio (TER) for ETFs tend to be less than that for the average index tracking fund active fund

Source: BlackRock, as at end of 2012.

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European ETF clients are primarily institutional, retail adoption slower

Institutional Wealth Managers Intermediary Direct Retail

Main ETF Users

Discretionary AMs

Investment Bank AMs

Broker Dealers

Insurance

Hedge Funds

Pensions (in-house managed assets)

Pensions (externally managed assets) – via consultants

Private Banks

Independent Wealth Managers

(Multi) Family Offices

Platforms (eg fund supermarkets and wraps)

IFA networks

Individual IFA firms

‘Sophisticated’ individual investors

Main ETF Uses

Tactical adjustments

Cash equitisation

Transitions & rebalancing

Core/satellite

Portfolio completion

Duration management & liability matching

Credit strategies

Cash equitisation

Rebalancing

Strategic allocations

Tactical allocations

Thematic exposure

Stand alone products or part of a risk-rated/asset allocation solutions

Core building blocks

Strategic allocations

Tactical allocations

Short-term exposure to markets & asset classes

Core portfolio building blocks

Portfolio construction (ie improve diversification)

Source: BlackRock, as at end of 2012.

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Further demonstrating the shift from tactical to strategic is holding period, where 51% of institutions averaged ETF holding periods of one year or longer, up from 36% in 2011.*

ETF applications in institutional portfolios

Source: 2012 Greenwich Associates - U.S. ETF Research. Reference indication for US only. Base: 62 pensions, foundations and endowments. Interviews conducted between February and April 2012

A recent Greenwich Associates survey indicates that 40% of the pensions, foundations and endowments polled plan to increase their use of ETFs over the next year*

Institutions which were once using ETFs solely for transitions or rebalancing are now using them for increasingly strategic purposes with longer holding periods

Liquidity overlay strategies have surged in popularity among institutional funds, where the % of institutions implementing these strategies has increased from 3% in 2010 to 31% in 2012.*

9


ETF usage example: core satellite strategy

ETFs lend themselves to use in both core and satellite portfolios.

Core:

Broad diversification by closely mirroring asset class benchmarks

Consistent performance relative to a benchmark

Low costs

Improved risk management

Satellite:

Precise exposure to a wide range of discrete market sectors, specific styles or market capitalisations indices.

Exposure to selected market segments at low costs

Eliminating security selection or manager selection risk

Source: BlackRock, as at 2012.

10

Flow Recap


YTD flows

Global ETP Cumulative Net Flows/ $Bn Europe ETP Cumulative Net Flows/ $Bn


2013

2012

12


Global ETPs versus mutual fund flows

Developed Markets Equity ($ bn)

Mutual Fund Flows

ETP Flows

Fixed Income ($ bn) Emerging Markets Equity ($ bn)


13


ETP flow 13-month rolling net flows and snapshot across exposures ($bn)

Monthly flow comparison – Global

February flows of $10.6 bn ensured the strongest 2-month start for equities

DM equity gathered $13 bn indicating continued strong momentum, while EM equity flows slowed compared to the prior month and HY fixed income witnessed outflows

Dividend income equity continued gathering momentum at $1.6 bn of inflows in February

FI flows reflected the duration rotation theme with investors moving towards the short end of the yield curve. February inflows into short maturity FI ETPs totalled $4.0 bn

Gold is losing its luster with ETP outflows totalling at $5.6 bn in February


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ETP flow 13-month rolling net flows and snapshot across exposures ($bn)

Monthly flow comparison – Europe

The momentum of strong ETP inflows continued in February at a similar level to January

Noticeably, EM inflows were the weakest in the equity space, particularly when looking at y-o-y change

There are slightly less ETP flows into equities compared to January with a small uptick in FI inflows


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Flow breakdown – Global and Europe

In February 2013 (commodity outflow: $5.1bn) YTD 2013 (commodity outflow: $5.3bn)

In February 2013 (commodity outflow: $1.2bn) YTD 2013 (commodity outflow: $0.8bn)

GLOBAL

EUROPE


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Equity overview – February

Global (Mn $) Europe (Mn $)


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Europe focus - February

Global (Mn $) Europe (Mn $)


18


EM country focus

EM Country Flows (Mn $)

China Brazil India

Russia South Korea Mexico

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Source: Bloomberg, BlackRock ETP Landscape. Data as at end of February 2013.


FI - February

Global (Bn $) Europe (Bn $)


20


Commodities and others - February

Global (Bn $) Europe (Bn $)


21

Due Diligence


BlackRock recently published a global ViewPoint, proposing a series of regulatory reforms and market standards to improve the market place for ETPs. ETP Due Diligence campaign is the next step, offering a framework for ETP due diligence to help investors’ investment process

Investors need to understand structural risk in various ETPs not just market risk

BlackRock proposes a new classification system with three distinct types of ETPs: ETFs, ETNs/ETCs, and ETIs

• For ETFs, physically replicating and derivative replicating ETFs need to be labelled clearly

• ETCs should be reserved for products backed by physical commodities with the rest of the commodity-linked products falling under ETNs

• ETIs is a catch-all for ETPs that are not funds or notes (e.g. warrants)

In our view, best practice means:

• Transparency

• Independence between sponsor and swap counterparty

• Multi counterparties

• Over collateralisation

Due Diligence Overview

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Classification

• UCITS-compliant

• Possible counterparty risk

• Not UCITS-compliant

• Non-fund debt structures

• Effectively unregulated

• Possible counterparty risk

• Neither notesnor funds

• Non UCITS-compliant

Exchange Traded Products (ETPs)

Exchange Traded Funds (ETFs)

• Physically replicating ETFs:

– Fully replicating

– Optimised/partially replicating

• Derivative replicating ETFs

Exchanged Traded Notes

(ETNs)/Exchanged Traded Commodities

(ETCs)

Exchange Traded

Instruments (ETIs)

A new approach to classifying ETPs

Different types of ETPs imply different levels of complexity and carry different structural risks. It is important for investors, especially the retail investor, to be aware of these risks.

iShares proposes a new classification of ETPs that further breaks them out into ETFs, ETNs/ ETCs and ETIs.

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Structure (continued)

Risk and complexity

Investors use ETPs to gain exposure to markets and accept they are taking market risk. They should also be aware of the additional risks associated withETP structures.

Structural risk depends on the counterparty risk and the level of regulation associated with the structure.

Physically replicating ETFs are generally low in complexity and risk, while synthetic ETNs and ETIs, being more opaque, are high in complexity and may carry high risk.

ETP structural complexity and risk

Risk

Physicalreplicating ETF

Synthetic ETN

Derivative replicating ETF

Physical ETC

ETI

Complexity

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Key areas of consideration for ETF selection

• Tax considerations and implications

• Evaluating ETF portfoliomanager performance

• Assess the flexibility to trade when you need to

• How to analyse the true cost of owningan ETF

• Benefits and risks of securities lending inan ETF

• Understand the ETP structure andstructural risk

Tax

3. Performance

5. Total Cost of Ownership

4. Trading and valuation

1. Structure

2. Tax

6. Securities lending

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It all starts with asking the right questions…


Introducing iShares Due Diligence Framework

1. Evaluate the ETP provider

2. Quick rule in rule out criteria

3. Evaluate the product structure

Physicallyreplicating ETF

Derivativereplicating ETF ETCs or ETNs

4. Select the product

General

Performance:tracking error and

tracking difference

Trading and valuation

Total Costof Ownership

Four Steps to ETP Selection

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iShares


AuM ($B) Market Share

759.5 39.3%

336.6 17.4%

245.2 12.7%

73.5 3.8%

51.2 2.6%

42.5 2.2%

28.9 1.5%

27.7 1.4%

21.1 1.1%

19.3 1.0%

327.5 16.9%

Global ETP landscape is concentrated around three providers

Global Providers AuM ($B)1

AuM, $B

The Stats

•$1,933B AuM

•Over 4,700 funds

Source: BlackRock Investment Institute – ETF Research, Bloomberg. Data as at end of 2012.

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European ETP landscape is concentrated around three providers as well

European Providers AuM ($B)1

AuM, $B

AuM ($B) Market Share

140.0 38.1%

50.2 13.7%

42.3 11.5%

24.1 6.6%

17.6 4.8%

16.0 4.4%

14.2 3.9%

13.3 3.6%

11.6 3.2%

6.8 1.9%

30.9 8.4%


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iShares has a strong global footprint in the $1.9 trillion ETP market

North America

• AuM: $1,405B

• 1,714 ETFs

• 58 providers

iShares

• 43% market share

• $600B, 368 ETPs

EMEA

• AuM: $389B

• 2,455 ETFs

• 53 providers (39 Europe)

iShares


• $140B, 206 ETPs

Total

• AuM: $1,933B

• 4,746 ETFs

• 182 providers

iShares


• $760B, 621 ETPs

Latin America

• AuM: $12B

• 35 ETFs

• 4 providers

iShares


• $10B, 20 ETPs

Asia Pacific

• AuM: $127B

• 542 ETFs

• 94 providers

iShares

• 8% market share

• $10B, 27 ETPs

iShares offices


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Regulatory Information

BlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Services Authority ('FSA'), having its registered office at 12 Throgmorton Avenue, London, EC2N 2DL, England, Tel +44 (0)20 7743 3000, has issued this document for access by Professional Clients only and no other person should rely upon the information contained within it.

BlackRock Advisors (UK) Limited is a juristic representative of BlackRock Investment Management (UK) Limited. Blackrock Investment Management (UK) Limited is an authorised financial services provider with the South African Financial Services Board, FSP No. 43288

Restricted Investors

This document is not, and under no circumstances is to be construed as an advertisement or any other step in furtherance of a public offering of shares in the United States or Canada. This document is not aimed at persons who are resident in the United States, Canada or any province or territory thereof, where the companies/securities are not authorised or registered for distribution and where no prospectus has been filed with any securities commission or regulatory authority. The companies/securities may not be acquired or owned by, or acquired with the assets of, an ERISA Plan.

Risk Warnings Investment in the products mentioned in this document may not be suitable for all investors. Past performance is not a guide to future performance and should not be the sole factor of consideration when selecting a product. The price of the investments may go up or down and the investor may not get back the amount invested. Your income is not fixed and may fluctuate. The value of investments involving exposure to foreign currencies can be affected by exchange rate movements. We remind you

that the levels and bases of, and reliefs from, taxation can change.

BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. The data displayed provides summary information, investment should be made on the basis of the relevant Prospectus which is available from BlackRock Advisors (UK) Limited.

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© 2013 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, ALADDIN, iSHARES, LIFEPATH, SO WHAT DO I DO WITH MY MONEY, INVESTING FOR A NEW WORLD, and BUILT FOR THESE TIMES are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United

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global and european etps: overview, flows, and due diligence stephen cohen head of ishares emea...

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