Matt HouganPresident Analytics & PublicationsETF.comLeveling the

Playing FieldDave NadigChief Investment OfficerETF.com

The ETF Revolution Is Just Getting Started

1

Bad Things Are Happening

2

Level The Playing Field

3

1

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Bill

ion

s

ETP Asset Growth

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Bill

ion

s

ETP Asset Growth

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Bill

ion

s

ETP Asset Growth

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Bill

ion

s

ETP Asset Growth

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

1993 2003 2013 2023

Bill

ion

s

ETP Asset Growth

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

1993 2003 2013 2023

Bill

ion

s

ETP Asset Growth

$-

$5

$10

$15

$20

12/31/2010 1/24/2014

WisdomTree (WETF) Stock Price

$1.7 trillion

Built on a narrow base

Institutional Advisory Retail

Total Cost

Taxes

Trading

Diversity

Distribution

ETF Hockey Stick Checklist

Large Cap Equity Mutual Funds: 1.37% Average

Large Cap Equity ETFs: 0.44% Average

ETFs cost fund companies less than mutual funds.So ETFs cost investors less.

Total Cost

Annual Fees As ETFs: $7.2 billion

Annual Fees As Funds: $21.9 billion

AUM ($, mm) Average ETF ERAverage Mutual Fund

ER

U.S. Equity 931,688 0.44% 1.37%

International Equity 406,477 0.56% 1.57%

Fixed Income 249,840 0.30% 1.06%

How Much Are ETF Investors Saving?

Source: Morningstar, ETF.com

$14,761,886,000Per Year

(That’s $40.4 million per day)

Who’s Got The Yachts Now?

Source: ETF.com as of 12/31/2013

But What About For Institutions?

Institutional Holding Periods

Source: Greenwich Associates. Institutional Funds and Asset Managers Lead Charge Into ETFs. Q2 2013.

0%

10%

20%

30%

40%

<1 month 1-6 months 7-12 months 1-2 years >2 years

2011 2012 2013

New Uses At The Core

Although ETFs first entered institutional portfolios mainly as tactical tools … many institutions indicate they are beginning to regularly use ETFs for many additional purposes, including gaining long-term exposures and implementing investment strategies.

- Greenwich Associates

Source: Greenwich Associates. Institutional Funds and Asset Managers Lead Charge Into ETFs. Q2 2013.

Dave Underwood, CIO, Arizona State Retirement System, in an interview with the Journal of Indexes

“We had not used ETFs in any meaningful fashion previously …

Very much to their credit, iShares … priced these ETFs at 15 basis points.”

Institutional Advisory Retail

Total Cost

Taxes

Trading

Diversity

Distribution

ETF Hockey Stick Checklist

Taxes

Source: Morningstar

Active MFPassive

MFETF

Large Cap Blend 1.92% 0.16% 0.00%

Large Cap Value 2.01% 0.08% 0.00%

Large Cap Growth 1.65% 0.04% 0.00%

Mid Cap Blend 4.26% 1.25% 0.00%

Small Cap Blend 3.54% 1.31% 0.00%

Foreign Large Blend 2.50% 0.32% 0.00%

Emerging Market 6.46% 0.02% 0.01%

Source: Morningstar, 2001-2011

ETF Tax Scandal: I Sell, You Pay!

Avg. Mutual Fund Flows By Month2007-2012

-$10,000

-$5,000

$0

$5,000

$10,000

$15,000

$20,000

$25,000

Bill

ion

s

Source: Investment Company Institute

Institutional Advisory Retail

Total Cost

Taxes N/A

Trading

Diversity

Distribution

ETF Hockey Stick Checklist

0%

10%

20%

30%

40%

10/1/2012 9/30/2013

% o

f To

tal M

arke

t (i

ncl

. OTC

/BB

)ETF Trading Activity

% of Shares Traded % of Value Traded

NYSE Most Actives (Friday)

TickerVolume

(millions)

SPY 183

EEM 117

BAC 111

GE 95

XKF 66

F 64

VXX 61

AA 59

C 55

IWM 52

Ticker Average Spread

IWM (Russel 2000) 0.01%

EEM (Emerging Markets) 0.02%

JNK (Junk Bonds) 0.02%

GLD (Gold) 0.01%

Institutional Advisory Retail

Total Cost

Taxes ?

Trading

Diversity

Distribution

ETF Hockey Stick Checklist

Diversity

Pure Beta

Nerdy Quant Stuff

Pure Active

People who dig ETFs?$1.7 Trillion

People who dig:

Bill Gross?

$2 Trillion

Institutional Advisory Retail

Total Cost

Taxes ?

Trading

Diversity

Distribution

ETF Hockey Stick Checklist

55% of ETF Assets18% of Institutions

Institutions

26,300 Advisors$920 Billion In Assets

Advisors

Retail

Asset Class Weight Fund Ticker ER

U.S. Equity 40% Schwab U.S. Broad Equity SCHB 0.04%

Developed Equity

30% Schwab International Equity SCHF 0.09%

Emerging Markets Equity

5% Schwab Emerging Markets Equity SCHE 0.15%

Fixed Income 15% Schwab U.S. Aggregate Bond SCHZ 0.05%

REITs 5% Schwab U.S. REIT SCHH 0.07%

Commodities 5% U.S. Commodity Index Fund USCI 1.03%

All-In Costs 0.10%

The 10 BPS ETF Portfolio

Asset Class Weight Fund Ticker ER

U.S. Equity 40% iShares Core S&P Total U.S. Stock ITOT 0.07%

Developed Equity

30% iShares Core MSCI EAFE IEFA 0.14%

Emerging Markets Equity

5% iShares Core Emerging Markets IEMG 0.18%

Fixed Income 20% iShares Core Total U.S. Bond AGG 0.08%

REITs 5% iShares Cohen & Steers REIT ICF 0.35%

All-In Costs 0.11%

The 11 BPS ETF Portfolio

Asset Class Weight Fund Ticker ER

U.S. Equity 35% iShares MSCI USA Quality Factor QUAL 0.15%

Developed Equity 20%db X-trackers MSCI EAFE Hedged

Equity DBEF 0.35%

EM Equity 10%WisdomTree Emerging Market Equity

Income DEM 0.63%

EM Equity 5%db X-Trackers Harvest CSI China A-

Shares ASHR 0.82%

Fixed Income 10% PIMCO Total Return Bond BOND 0.55%

Fixed Income 5% PowerShares Senior Loan Portfolio BKLN 0.65%

Fixed Income 5% SPDRs Barclays Short-Term High Yield SJNK 0.40%

Fixed Income 5% Vanguard Total International Bond BNDX 0.20%

Commodities 5% PowerShares DB Commodity DBC 0.93%

All-In Costs 0.39%

The 39 BPS ETF Portfolio

Price: Zero to 0.25%

Institutional Advisory Retail

Total Cost

Taxes ?

Trading

Diversity

Distribution

ETF Hockey Stick Checklist

2

The Gold Rush Problem

4 Worries

Toxic Products½ of

“Smart Beta” is Junk

Pay-to-PlayETF LipstickActive Pigs

Toxic Products

-100%

-80%

-60%

-40%

-20%

0%

20%

1/29/2009 1/17/2014

Tota

l Ret

urn

VXX Since Inception

½ of “Smart Beta”

is Junk

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

5/4/2011 5/4/2012 5/4/2013

SPLV

SPY

Crowding

½ of “Smart Beta”

is Junk

-0.40%

-0.35%

-0.30%

-0.25%

-0.20%

-0.15%

-0.10%

-0.05%

0.00%USMV 1-Year Tracking Difference

Tracking

½ of “Smart Beta”

is Junk

020406080100120140160180

-1.00%-0.50%0.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%

Flo

ws

($, M

illio

ns)

Pre

miu

m/D

isco

un

t

VIDI Fund Flows(Millions)

VIDI Premium

Trading

Pay-to-Play

Zero Commission≠

Zero Cost

ETF LipstickActive Pigs

WisdomTree Middle East Dividend (GULF)

Schwab Emerging Markets Equity (SCHE)

iShares Core MSCI Emerging Markets (IEMG)

3

Demo Time!

2,0001,9001,8001,7001,600

$

ETF.com Analytics

1,000900800700600

$

ETF.com Analytics

3002001000.00

$

ETF.com Analytics

0.002001000.00

$

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Morning Call

Instant ETF Check:

One More Thing

AlphaThink

Tank

AlphaThinkTank

Nouriel Roubini, Roubini Global Economics

Don Luskin, TrendMacrolytics

George Friedman, Stratfor

Ed Yardeni, Yardeni Economics

Tom Dorsey, Dorsey Wright Associates

Peter Schiff, Euro-Pacific Capital

Brendan Fitzsimmons, Medley Global Advisors

Rob Arnott, Research Affiliates

“What is the one area of the market you find most attractive right now?”

Asks:

“Peripheral Europe.

If you wanted to build a new auto factory somewhere in the world, you would either put it in Tennessee or in Spain. And that’s great.”

Don Luskin:

“Luskin’s call on Spain may raise a few eyebrows, but there is a solid ETF to play a resurgent Spanish economy: iShares MSCI Spain Capped ETF.

While not exactly cheap, the fund provides broad exposure and trades reasonably well. Be conscious of a heavy weighting in Financials, however.

Don’s other ideas …”

50 issues per year

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