1 Exchange Traded Products The differences between ETFs & ETNs & ETCs

2 What are Exchange Traded Products? Exchange Traded Products (ETPs)  Fastest growing product class traded on an exchange  Cost effective access to an asset class  Available on a wide range of equity & fixed income indices and single commodities  Comprised of ETFs, ETNs, (and ETCs)  Exchange Traded Funds (ETFs) are mutual funds and can be:  Physical ETFs - which hold the index securities  Swap-based ETFs - which replicate the index performance through the use of swaps  Exchange Traded Notes (ETNs) are debt instruments:  There are several sub-categories, such as Exchange Traded Commodities (ETCs)  Often ETNs are used to offer exposure to assets that can not be achieved with a fund, for example single commodities

3 Global ETP Growth Source: ETF Research and Implementation strategy team, BGI, Bloomberg. As of April 2009

4 Why are there different legal structures? Many investors prefer a mutual fund structure  Investor protections & regulations  UCITS, SEC 1940 Act, Unit Trusts, OEICs, etc…  Governed by a Prospectus, with regular accounts and reports  Portfolio is mutually owned by investors, not product provider  Familiarity & comfort of structure  Majority of Retail assets held in pooled products are in mutual funds Some asset classes are not available in a mutual fund structure  Single Commodities  Foreign exchange  Options strategies  Principal protected investments  Buy/write or covered call

5 How do Physical ETFs obtain their economic exposure? Source: Barclays Global Investors 1Fund domiciled and managed in Germany 2Subfund of iShares plc managed in Ireland 3Subfund of iShares II plc managed in Ireland 4Subfund of iShares III plc managed in Ireland. All holdings are published on a daily basis on %NameMarket price Country 6.53TOTAL SA40.67France 5.04TELEFONICA SA16.08Spain 4.28 BANCO SANTANDER SA 7.00Spain 4.07E.ON AG28.88Germany 3.70SANOFI-AVENTIS46.82France 3.36GDF SUEZ34.00France 3.32ENI SPA17.83Italy 3.30SIEMENS AG-REG52.96Germany 3.24NOKIA OYJ11.15Finland 2.96 FRANCE TELECOM SA 20.37France  Cash-based ETFs track performance by buying underlying securities iShares DJ EURO STOXX 50 3 As at 08/01/2009

6 How do Swap based ETFs obtain their economic exposure? iShares Dow Jones STOXX 600 Telecommunications Swap (DE) 1 As at 31/03/2008  Swap Based ETFs „outsource“ index tracking by entering a swap agreement  Swap-based ETFs buy securities  In addition a swap is structured Holdings for swap-based funds are published in annual reports Equities# of shares in 1000 Weight Adidas AG85, Allianz SE31, Assicurazioni Generali130, BASF SE42, Bayer AG65, BNP Paribas S.A.61, Carrefour S.A.80, Commerzbank AG188, Continental AG56, Daimler AG71, Basket + Swap Source: Barclays Global Investors 1 Fund domiciled and managed in Germany 2Subfund of iShares plc managed in Ireland 3Subfund of iShares II plc managed in Ireland 4Subfund of iShares III plc managed in Ireland Swap Counterparty ETF

7 ETF Swap Mechanism Equity basket performance: increase from €100 to €105 ETF Swap Counterparty Total return index performance: increase from 100 to 107 Payments from swap agreement Leg II pays €7 Leg I pays €5  Swap-based ETFs buy securities  i.e. Swap-based Sector iShares buy basket of liquid stocks of DJ Global 1800 universe  In addition a swap is structured  Leg I: pays performance of equities  Leg II: receives performance of total return index, that is tracked - 5€ + 7€ = +2€ ETF NAV:105€ + 2€ = 107€

8 How do ETNs obtain their economic exposure?  The ETN is a debt obligation of the issuer that is linked to a derivative.  An ETN looks similar to a Swap based ETF, except there is no basket of securities.  Differences between Swap based ETF & an ETN:  Legal structure (Fund vs. Debt)  Collateralization  UCITS are required to collateralize 90% of counterparty exposure  Notes may use collateral, but are not required  Why does the swap matter?  Counterparty risk in the derivative contract (swap)  Variable cost of swap paid to counterparty over time, not in the TER (a “swap spread”)  Creates a single dealer trading model for the ETN/ETF shares on exchange

9 How to quantify counterparty risk The cost of buying protection against default is the CDS spread Credit Default Swaps (CDS) ensure against default of a counterparty Source: Barclays Capital, as at 13/01/2009

10 Why does this matter?  Swap based ETFs & ETNs can be creditors to the Counterparty.  Corporate action on Counterparty can greatly reduce liquidity.  September 15 – 19 th, 2008 highlighted Counterparty risks in ETPs

11 Gold on Tuesday (16/09/2008): No Bid or Offer Source: Bloomberg

12 Gold on Friday (19/09/2008): Still No Bid or Offer Source: Bloomberg

13 Examples of each type of ETP structure Physical-basedDerivative based ETFsAll iShares Dublin domiciled ETFs, e.g. - iShares FTSE iShares £ Corporate Bond - iShares Index Linked Gilts etc CS XMTCH Lyxor db x-trackers iShares DE SWAP sector ETNsGold Bullion SecuritiesETF Securities (other)

14 Comparing ETFs and ETNs Part 1 Exchange Traded Funds (ETFs)Exchange Traded Notes (ETNs) Exchange listedYes Easy accessible investment vehicles for a range of asset classes Yes Low Tracking ErrorYes Low costsYesMostly Exposure to market risk of the asset class / index Yes StructureMutual FundNote UCITS FundMostlyNo Underlying holdingsIndex securities for physical ETFs Index swap plus a basket of non-index securities for swap-based ETFs N/A Source: BGI

15 Comparing ETFs and ETNs Part 2 Exchange Traded Funds (ETFs)Exchange Traded Notes (ETNs) Fund/note issuer riskNo, mutual funds hold assets in ring-fenced segregated accounts or ring-fenced fund company Yes, bears exposure to credit worthiness of note issuer Swap counterparty riskNo, for physical ETFs Yes, for swap-based ETFs limited to 10% under UCITS and sometimes reduced further through ETF provider No Other counterparty risk considerations Securities lending activity and collateralization of such activity Some notes are backed by collateral or guarantees to decrease issuer risk TransparencyYes, Full holdings disclosed for physical ETFs Limited for swap-based ETFs Limited Competitive Multi Dealer Model to trade on and off exchange Yes, for physical ETFs possible Limited, for swap-based ETFs Limited Source: BGI

16 Disclaimer Regulatory Information Barclays Global Investors Limited ('BGIL'), which is authorised and regulated by the Financial Services Authority ('FSA'), has issued this document for access by Professional Clients in the UK only and no other person should rely upon the information contained within it. iShares plc, iShares II plc and iShares III plc (together 'the Companies') are open-ended investment companies with variable capital having segregated liability between their funds organised under the laws of Ireland and authorised by the Financial Regulator. The German domiciled funds are "undertakings for collective investment in conformity with the directives" within the meaning of the German Law on the investments. These funds are managed by Barclays Global Investors (Deutschland) AG which authorised and regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. For investors in the UK This document is directed at 'Professional Clients' only within the meaning of the rules of the FSA. Certain of the funds mentioned in this document are not registered for public distribution in the UK. In respect of these funds, this document is intended for information purposes only and does not constitute investment advice or an offer to sell or a solicitation of an offer to buy the funds described within and no steps may be taken which would constitute or result in a public offering of the funds in the UK. This document is strictly confidential and may not be distributed without authorisation from BGIL. With respect to the funds that are registered for public distribution in the UK, most of the protections provided by the UK regulatory system do not apply to the operation of the Companies, and compensation will not be available under the UK Financial Services Compensation Scheme on its default. The Companies are recognised schemes for the purposes of the Financial Services and Markets Act Important information is contained in the relevant prospectus, the simplified prospectus and other documents, copies of which can be obtained by calling , from your broker or financial adviser, by writing to Barclays Global Investors Limited, iShares Business Development, Murray House, 1 Royal Mint Court, London EC3N 4HH or by writing to the Manager of the Companies: Barclays Global Investors Ireland Limited, New Century House, International Financial Services Centre, Mayor Street Lower, Dublin 1, Ireland. 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 are not authorised or registered for distribution and where no prospectus for the Companies has been filed with any securities commission or regulatory authority. The Companies may not be acquired or owned by, or acquired with the assets of, an ERISA Plan. Risk Warnings Shares in the Companies may or may not be suitable for all investors. Barclays Global Investors Limited does not guarantee the performance of the shares or funds. The price of the investments (which may trade in limited markets) may go up or down and the investor may not get back the amount invested. Your income is not fixed and may fluctuate. Past performance is not a reliable indicator of future results. The value of the investment 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. Affiliated companies of Barclays Global Investors Limited may make markets in the securities mentioned in this document. Further, Barclays Global Investors Limited and/or its affiliated companies and/or their employees from time to time may hold shares or holdings in the underlying shares of, or options on, any security included in this document and may as principal or agent buy or sell securities. 'iShares' is a registered trademark of Barclays Global Investors, N.A. All other trademarks, servicemarks or registered trademarks are the property of their respective owners. © 2009 Barclays Global Investors Limited. Registered Company No All rights reserved. Calls may be monitored or recorded.