Navigating The ETF Universe John Grossmann “WestWFA” InvestFest 2007

Topics ETF 101 ETF 101 Advantages & Features Advantages & Features Products & Providers Products & Providers Applications Applications InvestFest participant experience InvestFest participant experience

ETF 101

Evolution and History 1893 Initial US pooled fund – (Harvard) 1924 Massachusetts Investors Trust - public fund 1928 First no load fund (Scudder Stevens & Clark) 1971 First index fund (Samsonite pension) 1975 Bogle creates S&P index (Vanguard) 1990 “TIP” Toronto Index Participation - first ETF 1993 Spiders created by State Street “Eendragt Maakt Magt” 1774

What is an ETF ? “Exchange Traded Fund” Essentially morphing an index fund into a stock Tremendous growth since 2000 (50% per year) Number of ETFs Assets

ETF Industry Structure Market Makers ETF Stock Market Basket of Stocks “Creation Units” VF Investor

ETFs 52 Billion Today 400+ ETFs 500+ Billion Rapid Growth Nearly 50% annual growth rate over the past seven years!

Advantages and Features

ETF Advantages & Features  Cheap  Tax friendly, tax smart  Diversified  Transparent  Flexibility  NAV stable (compared to CEF)

Advantages over Mutual Funds  100% invested (no cash drag)  More available than mutual funds  No frequent trading restriction  Minimizes style drift  Less susceptible to after hours “deals” Note: competition from ETFs are driving down prices across the industry down prices across the industry

Trades Like A Stock  Buy long, sell short  Trades during market hours  Stop, limit, GTC… orders  ETFs can be margined  Short on a down tick  Options available on many ETFs

Products & Providers

ETF Products ETF Products Broad MarketFixed Income Size Style Region Sector Single Country Lower risk, less volatile Higher risk, more volatile Specialty

Most Active ETFs Volume Leaders (Millions of shares per day) Volume Leaders (Millions of shares per day) Nasdaq 100QQQQ100+ !! Spider 500SPY65 iShares Russell 2000IWM40 iShares MSCI JapanEWJ25 Energy Sector SpiderSLE22

ETF Research What index? What index? Rebalanced frequency Weighting (market cap, equal, other) Tracking accuracy Number of holdings Number of holdings Annual expense ratio Annual expense ratio NAV drift check NAV drift check Does this ETF fit into your portfolio? Does this ETF fit into your portfolio?

ETF Providers Barclays – iShares Barclays – iShares State Street – Spiders State Street – Spiders Vanguard (vipers) Vanguard (vipers) Power Shares Power Shares ProShares ProShares Wisdom Tree Wisdom Tree Rydex Rydex

Barclay iShares Over 50% of all ETF trade Over 50% of all ETF trade 130 equity ETFs (40 international !) 14 fixed income 3 commodity Market cap and style combinations Example - EFA Example - EFA MSCI EAFE index of 822 stocks Europe, Australia and Far East 39 Billion assets 0.35% annual expense Nearly 15% annual gain over 5 years

iShares

State Street Spiders First ETF ~ S&P 500 Spider First ETF ~ S&P 500 Spider 67 ETFs Unit trust - dividend issue Noted for core, style and sector ETFs Example - MDY Example - MDY Midcap Spider 400 stocks Approx 14% annual return over 11 years Annual expense 0.25%

Vanguard (vipers) Noted for ultra low expense ratios ( %) Noted for ultra low expense ratios ( %) Late to create ETFs, currently 27 choices Just 3 international Example Example MSCI Emerging Markets – VWO 868 stocks 0.30% expense ratio

Pro Shares & Power Shares Pro Shares Pro Shares Offers 40+ selections Unique short/long 200% ETFs Example: Ultra Oil & Gas (DIG - 200%) Power Shares Power Shares “Enhanced” indexes Modifying list, changing weighting Rebalanced quarterly

Applications

Fund Substitute ETF Mutual Fund Lower annual expense 100% invested Diversity Minimizes style drift Available Why ?

ETF Widows & Orphans Why ? ( Non-active Asset Pools ) Easy maintenance Low annual expense Diversity You control cash percent

Core vs Satellite Core vs Satellite Stock Portfolio Performance Enhancing “ETF Satellites” Foreign Stock ETF Sector Rotation ETF Small Cap ETF

Single Country Stock Indices – Top/Bottom

Satellite vs Core Satellite vs Core ETF Core Performance Enhancing Stock Picks CF Industries Silvercorp Marriott Yamana Gold SFL BHP

Audience Experience Q & A