Powerpoint Templates Page 1 Powerpoint Templates Exchange-Traded Funds by Brady Finkenaur

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Powerpoint Templates Page 5 Exchange-Traded Funds Walks Like a Stock Talks Like a Mutual Fund Not Exactly Like Either Gradually Taking the Place of the Mutual Fund in the Financial Ecosystem

Powerpoint Templates Page 6 History of ETFs: The First Mutual Fund Developed in the Netherlands-1774 Liquidity Crisis in Amsterdam Vehicle for Small Investors to Pool Funds Broadly Diversified Across 100 assets on Three Different Continents Lasted Over 120 Years

Powerpoint Templates Page 7 History of ETFs: The Modern Day Mutual Fund Early1970’s: Research Shows That Actively Managed Funds Underperform Benchmark Indicies 1975: Jack Bogle Launches Vanguard 500, the First Index Mutual Fund Originally Ridiculed, Bogle’s Passive Investing Strategy Soon Gains Popularity

Powerpoint Templates Page 8 History of ETFs: Emergence of the ETF 1987: Stock Market Crash Creates Another Liquidity Crisis 1989: AMEX and Philadelphia Stock Exchange Trade “Index Participation Shares” (IPS) Chicago Mercantile Exchange and CFTC file suit to stop IPS

Powerpoint Templates Page 9 History of ETFs: The SPDR 1993: Standard and Poor’s 500 Depositary Receipt Unit Investment Trust Type Structure State Street Bank as Trustee Passive Index Fund That Tracks the Performance of the S&P 500

Powerpoint Templates Page 10 ETF Mechanics: Warehouse Receipts Process Farmer Warehouse Trader Kellog’s Receipt Grain Cash Receipt Cash GrainReceipt

Powerpoint Templates Page 11 ETF Mechanics: Process

Powerpoint Templates Page 12 ETF Mechanics: Process

Powerpoint Templates Page 13 ETF Mechanics: Basket Composition Price-Weighted Index (Dow Jones Industrial Average) Market Capitalization-Weighted Index (S&P 500, NASDAQ) SPDR 500 (SPY) Scaled to 1/10 th of the S&P 500 Portfolio and Contains Constituent Stocks in Proper Proportions

Powerpoint Templates Page 14 ETF Mechanics: Basket Composition-SPY Top 10 Holdings CompanyTicker% of portfolio Apple Inc. AAPL 2.96 Exxon Mobil XOM 2.88 General Electric GE 1.71 Chevron CVX 1.64 Johnson & Johnson JNJ 1.62 IBM 1.59 Microsoft MSFT 1.54 Google Inc. GOOG 1.51 Procter & Gamble PG 1.5 Pfizer PFE 1.48

Powerpoint Templates Page 15 ETF Mechanics: Net Asset Value Value of Underlying Portfolio Creation/Redemption Process Takes Place at the NAV Calculated and Disseminated Once a Day Intra-day Portfolio Value (IPV) Tracks Intrinsic Value During Trading

Powerpoint Templates Page 16 ETF Mechanics: How Do I Know I’m Getting The Right Price? Authorized Participants Engage in Arbitrage to Obtain Profit If ETF Shares Trade at a Discount to IPV, Then AP Would Buy ETF Shares, Exchange for Basket and Sell Stocks If ETF Shares Trade at a Premium to IPV, AP Would Buy Basket, Exchange for ETF Shares and Sell Shares

Powerpoint Templates Page 17 ETF Mechanics: Arbitrage Constant Arbitrage Throughout the Day Keeps the ETF Price in Line With the NAV Fees and Trading Costs Create “Bubble” Around NAV Where Arbitrage is Not Profitable Market Makers Also Profit From Bid/Ask Spread

Powerpoint Templates Page 18 ETF Mechanics: Tracking Error Divergence Between Price Behavior of ETF and Underlying Basket That Can’t Be Arbitraged “Cash Drag”: Dividends, Distributions, etc. Thinly Traded Index Large Portfolio Turnover Average Tracking Error %

Powerpoint Templates Page 19 ETFs Versus Mutual Funds

Powerpoint Templates Page 20 SPY Versus Vanguard 500 SPY Expense Ratio: 0.11% AUM (billions): $128 Tax-Adjusted 10 year return: 7.98% Vanguard Expense Ratio: 0.17% AUM (billions): $129 Tax-Adjusted 10 year return: 8.07%

Powerpoint Templates Page 21 ETF and Mutual Fund AUM (in $ trillions)

Powerpoint Templates Page 22 ETFs Catching Up Net Inflows of $806 Billion vs. $804 Billion Mutual Fund Inflows Since 2006 Over 1,400 Different ETFs Now Available Can Invest by Sector, Commodity, Geography, Asset Class, etc. Efficiency Increases With The Trading Volume

Powerpoint Templates Page 23 References Ackert L. F. and Y. S. Tian. “Arbitrage and Valuation in the Market for Standard and Poor’s Depositary Receipts”, Financial Management (2000) v29, Daley, Paul, P. Dorencz and D. Bargerstock. “ETF Liquidity Explained: A Framework for the ETF Trader,” Journal of Indexes, March/April Davidson, Lee. “The History of Exchange Traded Funds,” Morningstar.com, etfs.aspx, (Last Accessed 4/19/2013) Deville, Laurent. “Exchange Traded Funds: History, Trading, and Research,” Paris- Dauphine University, ouvertes.fr/docs/00/16/22/23/PDF/ETF-survey.pdf (Last Accessed 4/18/2013) ouvertes.fr/docs/00/16/22/23/PDF/ETF-survey.pdf “How Do ETFs Work?” Flexshares.com. research/how-work (Last Accessed 4/19/2013) research/how-work Richards, Archie Jr., “All About Exchange-Traded Funds,” McGraw-Hill, New York, 2003.