2. ETF Essentials Inside the ETF revolution
Jack Fowler
Vice President, iShares

3. Agenda Growth and Evolution of the ETP Market Recap: What is an ETF?
Advantages of ETFs
ETF Structures
ETF Trading and Total Cost of Ownership
Four Steps to ETP Selection
Practical uses of ETFs

4. Growth and Evolution of the ETP Market

5. Global ETP multi-year asset growth

6. European ETP multi-year asset growth

7. Europe vs. US – ETF Providers
ETF managers in Europe by AUM
ETF managers in the US by AUM
Source: Global ETF Research and Implementation Strategy Team, BlackRock, Bloomberg. As at Sept

8. What is an ETF?

9. What is an ETF? Two great investment ideas brought together
Stock
Mutual Fund
Tradable during the day
Diversified
ETFs
Key point: ETFs are diversified, tradeable index funds.
Key characteristics:
Like stocks: Intraday trading, low investment minimum (typically one share), trading strategies (limit orders, long or short, options)
Like index funds: Diversified, track benchmark indexes, low expense ratios, Low turnover
(Analogy if needed) ETFs and smart phones: Smart phones have changed the way we communicate, surf, play, and read. ETFs have changed the way investors invest. Both are widely adopted evolutions.
Fun stats:
ETFs represent a fraction, but growing share of the combined mutual fund/ETF market. ETFs were 5.2% of assets in 2007, that grew to 8.8% in Q (source: BNY Mellon/Strategic Insight, “ETFs 2.0: The Next Wave of Growth and Opportunity in the U.S. ETF Market”, June 2011)
Transition: Now that we understand the basics of what an ETF is, let’s take a look at how advisors are using them.
Diversified funds that trade like stocks

10. ETFs are index funds….
They are listed and traded like a stock on major stock exchanges globally
Index Fund
Simplicity
Transparency
Risk control
Cost control
Consistency of returns
Diversification
Mutual Fund
Open-End Fund
Single Stock / Future
Trading flexibility on exchange
Intraday pricing
Listed options
Ability to borrow / short
Any transaction size
Variety of trading strategies +
Exchange Traded Fund
ETFs occupy a unique position in the investment landscape: The intersection between and index fund and a listed security

11. Advantages of ETFs

12. Why are ETFs so popular? Transparency Liquidity Diversification
Investors know the ETF holdings, price and costs
Liquidity
ETFs offer two sources of liquidity:
Traditional liquidity measured by secondary market trading volume
Multi dealer model boosts the liquidity of iShares ETFs
Diversification
ETFs provide immediate exposure to a basket or group of securities for instant diversification
Broad range of asset classes including equities, bonds, commodities, investment themes, etc
Flexibility
ETFs are listed on exchanges and can be traded at any time the market is open
Pricing is continuous throughout the day
Cost effectiveness
ETFs offer a cost-effective route to diversified market exposure

13. Portfolio Managers purchase stocks to represent the index
Physical Based ETFs
Example for Illustrative Purposes : iShares FTSE 100 Physical based ETF
Portfolio Managers purchase stocks to represent the index
Exchange Traded Fund
Source: iShares website as at 17/09/12 and is for illustrative purposes only

14. Equity Market Volatility: Days with market move of more than 2%
For professional clients / qualified investors only
Source: Bloomberg as at 18/09/12

15. Diversification with ETFs
Equities
Fixed Income
Alternatives
Cash & Cash Alternatives
Commodities
World
UK Gilts
Property
Short Term Treasuries
Broad
Developed Markets
International Government
Private Equity
Precious Metals
Emerging Markets
Index-Linked Gilts
Global Water
Commodity Producers
Large, Mid, Small-cap
Corporate
Growth Value
Covered
UK Equity

16. ETF Structures

17. Structure Exchange Traded Products (ETPs)
Different types of ETPs imply different levels of complexity and carry different structural risks. It is important for investors, especially the retail investor, to be aware of these risks.
Exchange Traded Products (ETPs)
Exchange Traded Funds (ETFs)
Physically replicating ETFs:
Fully replicating
Optimised/partially replicating
Derivative replicating ETFs
Exchanged Traded Notes (ETNs)/Exchanged Traded Commodities (ETCs)
Exchange Traded Instruments (ETIs)
We believe for investors to clearly distinguish different types of ETPs and make informed investment decisions, a consistent classification is essential. Here we present the iShares ETP classification proposal.
We distinguish between three subcategories within the banner ‘Exchange Traded Products’.
The first category, ETFs (Exchange Traded Funds), is broadly drawn to include authorised funds offering diversified exposure.
These are spilt into further differentiation – Physical – Replicating / Optimised and Derivative replicating.
The second group is a more general class of ETNs/ETCs (Exchange Traded Notes/Exchange Traded Commodities).
The third group covering the rest of the ETP spectrum should be considered ETIs (Exchange Traded Instruments). ETFs

18. Structure Prioritisation
Compliance with the European Union UCITS Directive is critical to market funds from one EU country in other EU countries and UCITS demonstrates independent oversight and diversification
Can this product idea comply with UCITS?
Vehicle Choice
Comments
Physical ETF
Fund holding physical securities
Can we run it as a normal fund?
UCITS
Derivative
replicating ETF
Fund holding swaps
If not physical fund, will swaps be possible?
Physical
Exchange
Traded Commodity
Note backed by the physical asset
Can this asset be practically stored?
Non-UCITS
Will an institution guarantee the return?
Exchange
Traded Note
Note backed by an institution’s credit

19. Physical-based ETFs Two types: replicated and optimised Replicated
For example:
iShares FTSE 100
iShares EURO STOXX 50
iShares S&P 500
Optimised
For example:
iShares MSCI World
iShares Barclays Capital Euro Aggregate Bond
iShares MSCI Emerging Markets
Source: BlackRock. For illustrative purposes only.

20. Swap-based ETF
Key features:
Ability to construct UCITS compliant ETFs which are impossible to create with the physical structure
Full transparency (collateral, swap counterparties, swap exposure etc)
Good quality, UCITS-compliance collateral with an extra margin
Diversified counterparty exposure
They are still not physical-based ETFs
Multiple counterparties and over collateralised swap exposure?
Source: BlackRock. For illustrative purposes only.

21. Exchange Traded Commodities
For professional clients / qualified investors only
iShares defines ETCs as debt securities that are backed by fully-allocated physical holdings of precious metals held in secured vaults
Many ETCs are eligible for investment by UCITS but are not themselves units in a collective investment scheme as defined by the UCITS directive
iShares ETCs’ assets are held in ring-fenced segregated accounts
ETCs are typically backed by metal held in secured vaults

22. ETF Trading and Total Cost of Ownership

23. How traditional mutual funds work
Stock Exchange
Buyers
Mutual Fund
Sellers
Key point: Investors interact directly with the fund. This may have taxable consequences for all share holders.
First let’s review something we’re all familiar with….how a traditional mutual fund works.
Mutual fund shareholders interact directly with the fund, exchanging shares for cash or vice versa. The fund may take cash and buy securities or conversely sell securities in order to raise cash. When buying shares, shareholders receive the net-asset value (NAV) priced at the end of the trading day. As you know mutual fund regulations state that all shareholders must be treated equally, so that additional costs (costs in addition to the expense ratio) – transaction costs or tax distributions – are passed on to all remaining shareholders.
What does this mean? If a large redemption from a seller forces the mutual fund to liquidate part of the portfolio and realize a capital gain for the fund, other shareholders must bear those costs – even if none of them took any action.
Investors interact with the fund to buy or sell shares

24. ETFs work differently than traditional mutual funds
Stock Exchange
Buyers
iShares
“Authorized participants”
Sellers
Key point: Investors interact on an exchange – not with the fund. This helps insulate one shareholder from the actions of others. Fund is not necessarily forced to liquidate positions to meet a seller’s need.
All Exchange Traded Funds work differently than mutual funds.
When shareholders buy or sell, they are interacting with one another on the exchange just as they would when buying or selling a stock. This means that the transaction costs and tax consequences the investor may incur are confined to this transaction, just like when you buy and sell shares of any stock you own. That is, any costs or taxes an investor may incur when selling shares of ABC, Inc. do not affect any other shareholders of ABC, Inc. This is one of the primary differences between an ETF and a traditional mutual fund.
So what happens if a buyer (or seller’s) needs cannot be met by current market supply? How do new shares get to the market? Like a fund, shares of ETFs are continuously offered. The creation (and redemption) of shares occurs between what is known as an Authorized Participant and the fund. An Authorized Participant is often an institutional broker/dealer, a market maker. In the case of iShares ETFs, the holdings and weights of each fund, its assembly recipe, are published daily. When investors want shares of, say, the iShares S&P 500, the AP assembles (buys or gets from own inventory) each security within the S&P 500 in its precise weight and gives them to the fund. Then, in exchange for the securities, the fund gives the AP the shares of the fund. This is known as an “In-kind” transfer, and according to current IRS regulations, is a tax free exchange. Note that some markets and ETFs require cash transactions to create shares (and even redeem shares). Where possible, iShares leverages in-kind transfers.
In summary:
1) shareholders interact with each other on an exchange
2) Shares are created and redeemed by authorized participants and the fund
3) The process serves to insulate other shareholders from the actions of a particular shareholder
Analogy:
Flowers, bouquets and a flower shop.
Investors buy and sell on an exchange and are insulated from each other’s actions.

25. Generally ETFs are traded between brokers on the secondary market.
Basic model for access
Through a broker
Private
Client
Adviser
ETF
On a platform
Generally ETFs are traded between brokers on the secondary market.

26. Increasing Levels of Liquidity
Trading and Liquidity
iShares Capital Markets Group can assist clients with accessing each layer of liquidity.
Secondary Market
ADV
Compare volume and “on-screen” bid/offer data to total potential liquidity
Generate Transaction Cost Analysis (TCA) and provide limit order guidance
Help source liquidity through relationships with 200+ specialist market makers
Increasing Levels of Liquidity
Market Maker Indications of Liquidity
ETF Market Depth
Identify available liquidity through 50+ APs via the creation/redemption process
Creation/Redemption Liquidity
(Underlying Basket)
Primary Market
For illustrative purposes only.

27. Total Cost of Ownership
Passive Market Growth = More Passive Providers
New Providers = More Competition
New Providers More Competition = Lower TERs
= More Competition
Lower TER = Lower Total Costs

28. Total Cost of Ownership
The true cost of owning an ETF
Total Cost of Ownership:
Is NOT just TER.
Can be broken down into both internal as well as external factors.
Internal factors
External factors
Physical replicating
funds
Total Expense Ratio (TER).
Swap spread.
Securities lending revenue.
Rebalancing costs.
Trading spreads.
Creation/redemption.
Brokerage fees.
Tax.
Total Cost of
Ownership = +
Derivative replicating funds
BlackRock believes Total Cost of Ownership is an accurate measure of investing in an ETF.

29. Total Cost vs. TER – A Selection of iShares ETFs
Total Expense Ratio vs. Total Cost of Ownership
Basis Points (bps)
Source: BlackRock, Bloomberg. Data as at end of March 2012.

30. Four Steps to ETP Selection

31. Four Steps to ETP Selection
Evaluate the ETP Provider 1
Rule in and Rule Out Criteria: Tax, Legal and Compliance 2
Evaluate the Product Structure 3
Select the Product 4

32. Introducing iShares Due Diligence Framework
Four Steps to ETP Selection
1. Evaluate the ETP provider
2. Quick rule in rule out criteria
3. Evaluate the product structure
Physically replicating ETF
Derivative replicating ETF
ETCs or ETNs
4. Select the product
General
Performance: tracking error and tracking difference
Trading and valuation
Total Cost of Ownership

33. Practical uses of ETFs

34. Why do financial professionals use ETFs?
Return
Risk
Costs
Seek to outperform other investments
Manage risk
Spend less, save more
Diversification
Key point: Advisors and other investment professionals leverage the benefits of ETFs to help manage all facets of total performance (return, risks and costs). “Control what you can”
Return: Use ETFs for strategies that may help outperform
Numerous studies have shown that index investing often outperforms active funds (see S&P’s SPIVA report for one example).
Breadth/depth of ETFs together with tradability help express tactical views.
Risk: Use ETFs to manage several sorts of risk.
ETFs offer two types of instant diversification: immediate exposure to a group of securities and access to a broad range of asset classes to diversify a portfolio
Liquidity and flexibility: Listed on exchanges and can be traded at any time market is open. Underlying assets provide a second layer of liquidity
Transparency: Know what you own. iShares holdings are published daily on iShares.com; Continuous pricing; No style drift: iShares ETFs are designed to closely track an index
Costs: The less you spend, the more you save
Cost effectiveness: Expense ratios typically well below those of both active and index mutual funds. Stand-alone structure helps insulate shareholders from transaction costs created by other shareholder
Tax efficiency: Low turnover of index funds helps reduce costs. Stand-alone structure helps ensure that one shareholder’s actions do not create capital gains distributions for other shareholders.
Transition: Let’s look at how investment professionals are putting iShares ETFs to work.
Performance vs. active funds
Cost effectiveness
Tradability and flexibility
Tax efficiency
Express a view
Transparency

35. Practical uses of ETFs Core satellite
Portfolio construction/ Diversification
Interim beta/ Transition management
Cash equitisation
Delta 1 alternative
Risk management
Portfolio construction/Diversification
Sectors and exotic markets

36. Implementing Core / Satellite Strategies
Core - passively managed vehicles, such as ETFs or traditional index pooled funds lend themselves ideally to the core component of an investment portfolio due to four main reasons:
Broad diversification by closely mirroring asset class benchmarks
Consistent performance relative to a benchmark
Low costs
Improved risk management
Satellites - are typically more specialised investments which serve as active tools to deliver additional returns (alpha). ETF satellites have a number of advantages:
Precise exposure to a wide range of discrete market sectors, specific styles or market capitalisations indices.
Exposure to selected market segments at low costs
Eliminating security selection or manager selection risk
Active Strategy 2
Active Strategy 3
Active Strategy 1
ETFs
ETF Satellite
ETF
Satellite
Portfolio

37. Strategic and tactical
Tactical Model Portfolio
Add short-term views
Strategic Model Portfolio
Thematic Model Portfolio
Express thematic views
For illustration purposes only. 

38. iShares Advantage

39. Expertise across asset classes
Who is BlackRock?
BlackRock is a truly global firm that combines the benefits of worldwide reach with local service and relationships. We manage assets for clients in North and South America, Europe, Asia, Australia, the Middle East and Africa. The firm employs more than 10,100 talented professionals and maintains offices in 27 countries around the world. As of Q3 Earnings Report, BlackRock's assets under management total US$3.673 trillion across equity, fixed income, cash management, alternative investment, real estate and advisory strategies.
BlackRock’s capabilities are built around our clients’ greatest needs:
Client focus
We partner with clients and their advisers to build portfolios that reflect their objectives, risk tolerance and time horizons
Broader capabilities for better outcomes
We provide an industry-leading breadth of investment solutions across active management, quantitative, and index strategies, including our iShares® ETFs
A dedicated group—BMACS—creates customized, multi-asset solutions to address specialized needs
Global insights to uncover opportunities
Some 100 investment teams in 27 countries share their best thinking to gain the insights that can change outcomes
Culture of risk management
BlackRock’s risk management team works with portfolio managers while remaining truly independent, so their recommendations are unbiased and portfolio managers can make more informed decisions
Expertise across asset classes
Source: $3.67 trillion in assets as of 30 September 2012 includes commodity and currency mandates

40. BlackRock historical perspective
2008: Launched Financial Markets Advisory Business
Assets under management ($ billions)
2009: Merger
of BlackRock and BGI;
Hired Professionals from
R3 Capital Partners`
2008: Launched Financial Markets Advisory Business
2007: Quellos Group, LLC acquisition
1999: IPO (NYSE: BLK) Broad employee ownership
2006: Merger of BlackRock and MLIM
1995: Merged with PNC, offered common vision & fund platform
1988: Founded Blackstone Financial Management
2005: State Street Research and Management acquisition
1998: Integrated equity, fixed income, liquidity, and mutual funds under BlackRock name
2000: Launched BlackRock Solutions®
1992: Changed name to BlackRock

41. What sets iShares ETFs apart?
Our Experience
Largest ETF provider in the world
607 ETFs listed globally
$711.8 billion in assets1 +
Return
Risk
Our Focus
Total Performance philosophy
Holdings published daily
Award-winning website
Costs +
Our Scale
Part of BlackRock, the world’s largest asset manager
Over 40 years of indexing experience
Deep roots in every world region
Source: ETP Landscape Industry Highlights Montly Report September 2012

42. Due Diligence Resources and Tools
iShares ETP Due Diligence Guide
Key questions
Structure
Tax
Performance
Trading
Total Cost of Ownership
Securities Lending
iShares Four Steps to ETP Selection

43. Q & A

44. Disclaimers
Regulatory Information BlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Services Authority ('FSA'), registered office at 12 Throgmorton Avenue, London, EC2N 2DL, England, Tel +44 (0) iShares plc, iShares II plc, iShares III plc, iShares IV plc, iShares V plc and iShares VI 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. 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/securities are not authorised or registered for distribution and where no prospectus has been filed with any securities commission or regulatory authority. The companies/securities may not be acquired or owned by, or acquired with the assets of, an ERISA Plan. Risk Warnings Investment in the products mentioned in this document may not be suitable for all investors. Past performance is not a guide to future performance and should not be the sole factor of consideration when selecting a product. The price of the investments may go up or down and the investor may not get back the amount invested. Your income is not fixed and may fluctuate. The value of investments 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. BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. The data displayed provides summary information, investment should be made on the basis of the relevant Prospectus which is available from your Broker, Financial Adviser or BlackRock Advisors (UK) Limited. We recommend you seek independent professional advice prior to investing. In respect of the products mentioned 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 securities described within. This document may not be distributed without authorisation from BlackRock Advisors (UK) Limited. The Dublin domiciled funds which include the term ‘swap’ in their names are swap based funds. These funds enter into fully funded swap agreements with counterparties to obtain the performance of the funds’ respective benchmarks. Swap transactions are subject to the risk that counterparties may default on their obligations. If this were to occur, the relevant fund may sustain a loss. The funds intend to mitigate much of their credit risk exposure to each counterparty by obtaining collateral from the counterparty which will be held by a third party collateral agent. In the event of a default by a counterparty or collateral agent, the swap funds may still have some counterparty risk exposure to the defaulting counterparty or collateral agent respectively. In some circumstances, counterparties can terminate the swap agreements early which may impact the returns of the funds. In addition, the counterparties may seek to pass on any additional costs relating to the hedging of their risk exposure under the swaps to the relevant fund. In the event that a swap fund is unable to enter into suitable swap arrangements or maintain swap arrangements on acceptable terms, the fund may not be able to achieve its investment objective and policy unless it is able to track its benchmark by other means.