ETFs: Growth, Innovation, Competition March 18, 2009 Presenter & Co-author: Loren Fox

ETFs: Growth, Innovation, Competition 2 Strategic Insight: 23 Years of Business Intelligence SI: Data, Research, Consulting Clients Manage 90%+ of U.S. Mutual Fund Industry Assets Globally, 80+ Leading Managers & Distributors Simfund, the leading databases for Mutual Fund Competitive Intelligence: tracking flows, assets, performance, etc. on 60,000+ portfolios globally SIonline.com StrategicInsightGlobal.com AnnuityInsight.com SimfundFiling.com

ETFs: Growth, Innovation, Competition 3 Agenda: Preview Our New Report, On Sale Now ETFs: Growth, Innovation, Competition 200 pages, 70+ tables & charts Which ETFs are growing the fastest? The Increasing Diversity of ETFs Industry Trends Favoring ETF Expansion ETFs vs Traditional Mutual Funds The Future of ETFs More information:

ETFs: Growth, Innovation, Competition 4 ETFs’ Tremendous Growth 2008: $176B US Inflows, $268B Global

ETFs: Growth, Innovation, Competition 5 US Exchange Traded Products: More Than Just US Equity International Equity Bond Commodity Currency Leveraged/Inverse

ETFs: Growth, Innovation, Competition 6 Which US ETPs Saw Net Inflows in 2008 US Equity-Focused ETFs Leveraged Long ETFs Int’l/Global Equity ETFs Fixed Income ETFs Commodity/Currency ETFs In The Report: Flow/asset data by sub-category and ETF manager, top-selling products, etc.

ETFs: Growth, Innovation, Competition 7 Growing Diversity of US ETFs Starting in ‘06, ETF/ETN launches exploded: 634 new funds started since 01/2006 account for roughly 3/4 of all ETFs Exposure now available to shorting, frontier markets, commodities, ‘fundamental’ indexes, quant, etc. Diversified all-ETF portfolios now much easier Next hot spot: Actively managed ETFs In The Report: Much more on active ETFs, ETNs, leveraged/inverse ETFs, other growth areas; considerations for launching ETFs

ETFs: Growth, Innovation, Competition 8 Long-Term Trends: Asset Allocation “Creed” Asset Allocation an even bigger theme in coming years Shift in emphasis to asset allocation helps ETFs: most ETFs enable straight asset allocation Rise in Funds-of-Funds, Fund wrap programs, Target-Date Funds, etc. Strategic Asset Allocation: % exposure to international (stocks and bonds), currency, bonds/TIPs, ‘alternatives’ – ETFs enable simpler access to asset classes

ETFs: Growth, Innovation, Competition 9 Long-Term Trends Support ETF Growth: The Shift To Holistic Advice Investing has evolved: Stocks Mutual Funds Portfolios Financial advisors have evolved: Storytellers Chemists Doctors (Telling stories/info(Adding value by (Diagnose client’s to sell stocks) mixing assets) goals & prescribe solution) FA comp shifting from transaction-based to fees for advice

ETFs: Growth, Innovation, Competition 10 Long-Term Trends: Shift to Fee-Based Pricing (among advisor-oriented fund firms) Source: Strategic Insight survey

ETFs: Growth, Innovation, Competition 11 Fee-Based Distribution Channels Growing Faster

ETFs: Growth, Innovation, Competition 12 Fund Distribution: Fastest growing channels Intermediary-sold funds far outpacing direct Fastest growth in sales through: Investment-Only DC (+33% in 2007) Fund wraps (+28% in 2007) RIAs (5% of sales, but +32% in 2007) 2009 more of the same, relatively

ETFs: Growth, Innovation, Competition 13 SI Proprietary Survey of RIAs Half of RIAs: ETF use up by 25%+; see further increase In The Report: More from the survey – Most popular asset classes for ETF use, favorite ETF brands and why, most important characteristics of ETFs, etc.

ETFs: Growth, Innovation, Competition 14 ETFs vs. Traditional Mutual Funds Financial Crisis Investors rethink alpha vs. beta Increased focus on investor costs Non-correlation/ alternatives?

ETFs: Growth, Innovation, Competition 15 ETFs vs. Traditional Mutual of ETF use by individuals = substitution of stocks/separately managed accounts, and not of actively-managed mutual funds ETFs: Some competition with certain funds Potential competition from ETFs looms: Mutual fund firms – pressure to provide/highlight distinctive advantage of funds Even firms not in ETF space must understand it

ETFs: Growth, Innovation, Competition 16 US Equity Funds Anchored By Retirement Investing; Little ETF Share For Now Source: Strategic Insight / ICI

ETFs: Growth, Innovation, Competition 17 The Future of ETFs: Outside US Fast growth in Europe, slower in Asia

ETFs: Growth, Innovation, Competition 18 The Future of ETFs Additional ETF entrants coming (PIMCO, Schwab, etc.) New ETPs being launched: More precise slicing of market; new asset classes – enabling more diversification Global ETFs/ETNs to Hit $1 Trillion in Assets by 2011 (up from $730B at end-2008) In The Report: Evolution of Active ETFs; More on ETFs in DC Plans; More on What Everyone Can Learn From the Best ETF Marketing

ETFs: Growth, Innovation, Competition 19 The Future of ETFs Context: Deepening, broadening ETF audience Action: How to position within ETFs (Active ETFs?) Action: How to position against ETFs In The Report: Whole chapter on competitive issues; other sections include case studies of successful ETF businesses, sections on who uses ETFs & how & why

ETFs: Growth, Innovation, Competition 20 New ETF Report On Sale Now 200 pages 70+ charts/tables Report based on research using proprietary surveys, extensive discussions with industry players, SI’s Simfund databases, SEC filings. Buyers get select quarterly data updates, consultation Questions? Contact