Investment Symposium March 2012 P4: ETF Funds: Latest Developments for Risk Management and Investment Allan Levin Steve Mickle Moderator Allan Levin Deutsche Bank Fixed Income Exchange Traded Products Fixed Income Exchange Traded Products March 2012 FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION — Exchange Traded Funds are listed investment funds, just like stock — Fixed Income ETFs allow investors to obtain exposure to various indices and market sectors through a cash investment. Fixed Income ETFs Overview indices and market sectors through a cash investment. — Much of the liquidity in ETFs is generated by Authorized Participants (“APs”) who have the ability to create shares of a fund and pass them on to investors. Some Notable ETF Providers Available Asset Classes iShares PowerShares Treasury Inflation Allan Levin Investment Symposium / 26 March 2012 Deutsche Bank FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION 1 StateStreet Vanguard ProShares Direxion Deutsche Bank Agency MBS Corporate Specialty Products Multi-Sector Inverse & Leveraged Fixed Income ETP Market has been Growing Rapidly Now make up about 20% of the US ETF Market Allan Levin Investment Symposium / 26 March 2012 Deutsche Bank FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION 3/15/2012 2:16:34 PM 2010 DB Blue template 2 Some of the Largest ETFs are Fixed Income Six of the Largest 20 ETPs are Fixed Income ETFs Allan Levin Investment Symposium / 26 March 2012 Deutsche Bank FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION 3/15/2012 2:16:34 PM 2010 DB Blue template 3 US ETP AUM by Investment Focus – Fixed Income Approximately $210 Billion in Total as at February 2012 Market Share Govt/Corp Active 1.0% Aggregate 14.5% Convertible 0.4% Corporate Inflation 13.0% Muni 4.8% Mortgage 2.3% 6.2% Deutsche Bank Allan Levin Investment Symposium / 26 March 2012 FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION 3/15/2012 2:16:34 PM 2010 DB Blue template 4 Source: Deutsche Bank, BlackRock Investment Institute, Bloomberg, Reuters 20.0% Emerging markets 3.6% Government 21.0% High yield 13.3% Sample of Active Fixed Income ETFs Selected Large Fixed Income ETFs Sector Total AUM $Bn Largest AUM $Bn ADV $mm Aggregate 30 AGG 14.8 130 Corporates 42 LQD 19.8 205 High Yield 28 HYG 14.3 271 Inflation 27 TIP 22.5 150 EM 8 PCY 1.5 19 Mortgage 5 MBB 4.7 46 Deutsche Bank Allan Levin Investment Symposium / 26 March 2012 FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION 3/15/2012 2:16:34 PM 2010 DB Blue template 5 Source: BlackRock Investment Insitute, Bloomberg Muni 11 MUB 2.8 41 Treasury 44 TLT* 3.3 903 Gov’tCorp 13 BSV 7.6 54 * TLT has the largest ADV, but has lower AUM than SHY ($10.5Bn) 2011 Exceptional Growth in Fixed Income ETPs Strong Flows into Corporate ETFs — $48bn of new asset gathering in the US — $22bn of Inflows into Corporate Debt (esp IG), $9.5bn into Agg., $6bn into EM — ETFs received 2.8x higher flows than the ten-fold larger mutual fund industry — 42 New Fixed Income ETFs Listed in the US in 2011. Launches included Inflation-linked, International & Actively Managed Allan Levin Investment Symposium / 26 March 2012 Deutsche Bank FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION 3/15/2012 2:16:34 PM 2010 DB Blue template 6 Source: BlackRock Investment Institute, Bloomberg, National Stock Exchange (NSX), Deutsche Bank 2011 was an Excellent Year for Treasuries & TIPS Eight of the Ten Best Performing ETPs (14 of the 20 Best ETPs) TOP 20 ETPs by performance 2011 ETP Name Issuer A sset Class Ticker TER Perf% PowerShares DB 3x Long 25+ Year Treasury Bond ETN Deutsche Bank AG Fixed Income ETN LBND US 0.95% 117.80% Daily 30-Year Treasury Bull 3X Direxionshares Fixed Income ETF TMF US 0.95% 107.60% Dil Idi 2 B Sh Di i h EitETF INDZ US 095% 78 70% D a il y I n di a 2 x B ear Sh ares Di rex i ons h ares E qu it y ETF INDZ US 0 . 95% 78 . 70% ProShares Ultra 20+ Year Treasury ProShares Fixed Income ETF UBT US 0.95% 71.30% PIMCO 25+ Year Zero Coupon U.S. Treasury Index PIMCO Fixed Income ETF ZROZ US 0.15% 54.20% Vanguard Extended Duration ETF Vanguard Fixed Income ETF EDV US 0.13% 47.30% iPath US Treasury 10-year Bull ETN iPath (Barclays) Fixed Income ETN DTYL US 0.75% 46.20% Daily 10-Year Treasury Bull 3X Direxionshares Fixed Income ETF TYD US 0.95% 43.90% iPath US TSY Long Bond Bull ETN iPath (Barclays) Fixed Income ETN DLBL US 0.75% 42.90% PowerShares DB Base Metals Double Short ETN Deutsche Bank AG Commodity ETN BOM US 0.75% 41.80% iPath Short Enhanced MSCI Emerging Markets Index ETN iPath (Barclays) Equity ETN EMSA US 0.80% 41.30% ProShares Ultra Utilities ProShares Equity ETF UPW US 0.95% 32.40% ProShares Ultra 7-10 Year Treasury ProShares Fixed Income ETF UST US 0.95% 30.70% iShares Barclays 20+ Year Treasury Bond Fund BlackRock Fixed Income ETF TLT US 0.15% 28.80% iP th US T Fl tt ETN iP th (B l ) Fi d I ETN FLAT US 075% 26 80% Allan Levin Investment Symposium / 26 March 2012 Deutsche Bank FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION 3/15/2012 2:16:34 PM 2010 DB Blue template 7 iP a th US T reasury Fl a tt ener ETN iP a th (B arc l ays ) Fi xe d I ncome ETN FLAT US 0 . 75% 26 . 80% SPDR Barclays Capital Long Term Treasury ETF State Street GA Fixed Income ETF TLO US 0.14% 25.90% ProShares UltraShort MSCI Brazil ProShares Equity ETF BZQ US 0.95% 25.80% Vanguard Long-Term Government Bond ETF Vanguard Fixed Income ETF VGLT US 0.15% 24.60% PIMCO 15+ Year US TIPS Index Fund PIMCO Fixed Income ETF LTPZ US 0.27% 20.10% PowerShares DB Base Metals Short ETN Deutsche Bank AG Commodity ETN BOS US 0.75% 19.70% Source: Deutsche Bank, Bloomberg Finance LP, Reuters. Fixed Income ETFs Features and Risks ETF holdings are published every day Tracking error (due to bond selection, Features Risks Tradable intraday Open-ended rebalancing costs, etc.) Bid-offer spread / management fee Legal/fraud Risk (Normal due diligence must be exercised when investing in any fund managed by someone else, including ETFs. However ETF ll h i Deutsche Bank Allan Levin Investment Symposium / 26 March 2012 FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION ETF s are genera ll y seen as h av i ng an extremely low risk to fraud-type activities due to the transparency of the fund.) 3/15/2012 2:16:34 PM 2010 DB Blue template 8 Exchange Traded Notes (ETNs) Overview Description of ETNs — Exchange traded debt securities which provide a return specified by a benchmark index — Issued by a corporate institution, and so carry with them the risk of default by an issuer, causing the issuer not to be able to make payments described in the ETN prospectus — Typically, has one final payment at maturity which is determined by formula Deutsche Bank Allan Levin Investment Symposium / 26 March 2012 FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION — Generally ETNs are creatable and redeemable on any business day. The daily creation feature allows ETNs to be liquid even when traded volumes or total amounts outstanding are low. The daily redemption feature generally mitigates the long term credit exposure to the issuer, as any holder can redeem shares of the ETN at the index NAV for that day Exchanged Traded Notes ( ETNs ) Features and Risks No Tracking Error Senior Unsecured Credit Exposure Features Risks Transparency Tax Efficient Liquidity (short-term due to the ability to redeem) Less liquidity outside of underlying’s trading hours Subject to an investor fee Deutsche Bank Allan Levin Investment Symposium / 26 March 2012 FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION Leverage available Can be more flexible than ETFs Non-Principal Protected 3/15/2012 2:16:34 PM 2010 DB Blue template 10 Recent Innovations in Fixed Income ETPs as demonstrated by recent launches Categories — Inflation-Linked — Floating Rate — Sovereign Exposure — Emerging Markets Deutsche Bank Allan Levin Investment Symposium / 26 March 2012 FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION — US Fixed Income Sectors — Active Management — Different Exposure Structures Inflation-Linked ETPs Focus on reducing “real duration” exposure Shorter Duration TIPS Inflation Expectation ETPs ETP Ticker ETP Ticker Flexshares 3-Year TDTT & 5-Year Targeted TIPS TDTF iShares 0-5 Year TIPS STIP Powershares DB Inflation INFL & Deflation ETNs DEFL Proshares 30-Year TIPS/TSY RINF Spread FINF Ph UltP10 Y UINF Deutsche Bank Allan Levin Investment Symposium / 26 March 2012 FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION 3/15/2012 2:16:34 PM 2010 DB Blue template 12 P ros h ares Ult ra P ro 10 - Y ea r UINF TIPS/TSY Spread SINF Floating Rate Note ETPs Earn a credit spread while mitigating interest rate exposure Floating Rate Note ETPs ETP Ticker IShares Floating Rate Note FLOT Market Vectors IG FRN FLTR SPDR IG Floating Rate Note FLRN Deutsche Bank Allan Levin Investment Symposium / 26 March 2012 FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION 3/15/2012 2:16:34 PM 2010 DB Blue template 13 Sovereign Bond ETNs Summary of Sovereign Bond ETNs ITLY 1 x Long Exposure to 10-year Italian Sovereign Bonds (10-year BTP Futures) ITLT 3 x Long Exposure to 10-year Italian Sovereign Bonds BUNL 1 x Long Exposure to 10-year German Sovereign Bonds (Bund Futures) BUNT 3 x Long Exposure to 10-year German Sovereign Bonds JGBL 1 x Long Exposure to 10-year Japanese Sovereign Bonds (10-year JGB Futures) JBGT 3 x Long Exposure to 10-year Japanese Sovereign Bonds JGBS 1 x Inverse Ex p osure to 10- y ear Ja p anese Soverei g n Bonds Deutsche Bank Allan Levin Investment Symposium / 26 March 2012 FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION 14 p yp g JBGD 3 x Inverse Exposure to 10-year Japanese Sovereign Bonds SBND 3 x Inverse Exposure to 25+ year US Treasuries (Ultralong bond futures) LBND 3 x Long Exposure to 25+ year US Treasuries Country or Regional Fixed Income ETPs Diversified exposure to Sovereign and International Corporate Bonds Country-Specific ETPs ETP Ticker Region-Specific ETPs ETP Ticker PIMCO Australia Bond AUD PIMCO Canada Bond CAD PIMCO Germany Bond BUND PSh G S GGOV WisdomTree Asia Local Debt ALD Market Vectors LatAm Ag. Bond BONO Market Vectors Renminbi Bond CHLC GhiYBd RMB Deutsche Bank Allan Levin Investment Symposium / 26 March 2012 FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION 3/15/2012 2:16:34 PM 2010 DB Blue template 15 P ro Sh ares G erman S ov GGOV / Sub-Sov Debt G uggen h e i m Y uan B on d RMB Increasing Sectorization of Fixed Income Diversified exposure to Sovereign and Corporate Bonds Sector-based ETPs ETP Ticker Corporate Debt ETPs ETP Ticker Powershares Senior Loans BKLN IShares GNMA Bonds GNMA iShares CMBS Bonds CMBS iShares Industrials Sector ENGN iShares Utilities Sector Bonds AMPS iShares Aaa-A Rated Corportes QLTA Deutsche Bank Allan Levin Investment Symposium / 26 March 2012 FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION 3/15/2012 2:16:34 PM 2010 DB Blue template 16 Active ETFs Combining Active Management and Fixed Income ETFs PIMCO Total Return Exchange-Traded Fund (TRXT) — Modeled on PIMCO’s flagship Total Return strategy — Cannot use options, futures or swaps — Daily disclosure of holdings Deutsche Bank Allan Levin Investment Symposium / 26 March 2012 FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION 3/15/2012 2:16:34 PM 2010 DB Blue template 17 Notes: 9pt, regular, bottom aligned, bottom margin only set at 0.2cm (1) Footnote 9pt, regular, spacing 0pt Source: 9pt, italic, spacing 0pt [...]... and regulated by the Financial Services Authority for the conduct of UK business Deutsche Bank Allan Levin Investment Symposium / 26 March 2012 FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION 20 ETF Funds: Latest Developments for Risk Management and Investment SOA Investment Symposium Monday, March 26th 2012 FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION Growth of exchange traded... and b are the same sign, then the leveraged ETF outperforms twice the index  If a and b have opposite signs, then the leveraged ETF underperforms twice the index  So, reversals hurt the performance of the leveraged ETF and continuations help performance 8 Better performing leveraged ETFs 9 No adjustment made for fees or hedging costs Disclaimer  This is the property of Garrett Asset Management Management... ETF Funds: Latest Developments for Risk Management and Investment Elliot Noma Garrett Asset Management, LLC Recent innovations  Expansion into new markets  Structures to tap new opportunities  Use in structured products Expansion into new markets  Fixed income for emerging markets Structures to tap new opportunities  Total return bond funds  I fl ti protection funds Inflation t ti f d  Buy -and- hold... appropriate for all investors and before entering into any transaction you should take steps to ensure that you fully understand the transaction and have made an independent assessment of the appropriateness of the transaction in the light of your own objectives and circumstances, including the possible risks and benefits of entering into such transaction For general information regarding the nature and risks... companies FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION 17 ETF Classification: GAAP Accounting ASC 320 (formerly FAS 115) provides guidance on how to classify investments in debt and equity securities Description ETFs classified as “available for sale” ETFs classified as “trading securities” Valuation, per ASC 320 (formerly FAS 115) Fair value Fair value Fair Value Pricing, per ASC 820 (formerly... Glossary and thus are not eligible for fixed income classification Source: AICPA Trends and Techniques Publication, 2011 ‡ Information is based on the definition of “Security Classifications” from ASC 320 Source: AICPA Trends and Techniques Publication, 2011 FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION 18 Carefully consider the iShares Funds' investment objectives, risk factors, and charges and. .. statement • Fixed Income ETFs are considered equity instruments under GAAP and therefore can only be classified as “trading securities” or “available for sale”.† • Intent is the key to determine whether to classify an ETF as a “trading security” or “available for sale” Investments that are bought and held principally for the purpose of selling them in the near term (thus held for only a short period... 14 providers now offer 168 fixed income ETFs Source: BlackRock and Bloomberg as of 12/31/2011 FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION 7 Fixed income ETF trading volume • The first Fixed Income ETFs (TLT, SHY, IEF, AND LQD) were launched in 2002 by iShares and today iShares comprise 70% of the FI ETF trading volume • Since 2008, fixed income ETFs trading volume has grown at 56% CAGR1... Grade Corporate and High Yield proxied by Barclays Capital Liquidity Cost Scores FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION 9 Understanding fixed income ETF trading behavior Four drivers of premiums/discounts in fixed income ETFs:  NAV – Underlying bonds marked to the Bid side of OTC bond market to calculate ETF NAV – ETF trades at market clearing price  ETF Supply & Demand – Balance... Lending • ETF units and underlying assets can be lent out to potentially offset holding costs Tax Efficiency • In-kind creation and redemption mechanism helps insulate ETF holders from unintended tax consequences • Experienced portfolio management team actively seeks to minimize capital gains *Source: Morningstar, BlackRock Investment Institute, as of 12/31/11 ETF TER is for all US listed equity ETFs There . Supervising Authority) and regulated by the Financial Services Authority for the conduct of UK business. ETF Funds: Latest Developments for Risk Management and Investment SOA Investment Symposium Monday,. Investment Symposium March 2012 P4: ETF Funds: Latest Developments for Risk Management and Investment Allan Levin Steve Mickle. objectives and circumstances, including the possible risks and benefits of entering into such transaction. For general information regarding the nature and risks of the proposed transaction and types