exchange traded funds - alliance trust savings

7/30/2019 Exchange Traded Funds - Alliance Trust Savings

1/28

ExchangETradEd Funds

a totoy e to

December 2012


2/28


3/28

Ee Te o tble a discussion

about ETFs with our panel o experts.

dym et lloto Manooj Mistry

o Deutsche Bank talks about the choices

available with ETFs.

Te Powe o Fmetl Ravinder Azad

o Invesco reviews the stock markets.

Te ETF Boom David Stevenson gives an

overview o the ETF market.

The ETF BoomDynamic asset allocation20 24

alle Tt sv Lmte

PO Box 164,

8 West Marketgait

Dundee DD1 9YP

Tel +44 (0)1382 573737

F +44 (0)1382 321183

Eml [email protected] www.alliancetrustsavings.co.uk

14

20

22

24

helpul insight direct rom investment proessionals.

Guest experts provide their views in eature articles rom

HSBC, Deutsche Bank and Invesco PowerShares, whilst

our article gives you the practicalities o investing in

ETFs a how to guide.

I hope you enjoy this ETF special edition, and would

like to hear rom you about any other products or

developments you would like urther inormation

about. Please send any eedback or suggestions to

[email protected]

Gay mLuki

Marketing Director

Alliance Trust Savings


4/28

n the good old days, investors

looking to buy exposure to a major

market like the FTSE 100 or the

American S&P 500 had two simple choices

buy an actively managed und that invested

in the companies in this index, or buy the

actual companies in the index as individual

stocks. Plenty o investors have continued to

stick with this traditional style o investing

but a much cheaper and hugely popular

alternative (in the USA at least) has emerged

in recent years. This consists o investing in

a und that tracks a major index such as the

FTSE 100 or S&P 500. The actual tracking

as well discover - is very simple to

understand and involves the und manager

(or it is a und) buying the long list o

constituent stocks in the index.

The actual structure o the resulting und willvary enormously with the big choice being

between an unlisted, traditional unit trust or a

I

4 EXCHANGE TRADED | How ETFs are Structured

OvER THE pAsT DECADE A

quiET REvOluTiON HAsRippED THROuGH THE

NORmAlly AiRly plACiD

wORlD O iNvEsTmENT.

David Stevenson is a nancialjournalist and media entrepreneur.He writes the Adventurous Investorcolumn or the weekend FinancialTimes and the Contrarian column orindustry newspaper Investment Week.Hes also a regular contributor to theInvestors Chronicle and has written

a number o books on investing orthe FT and Prentice Hall includingthe main reerence book on ETFs.

David was also a senior producerin television working on arange o programmes at the BBCincluding The Money Programmeand Tomorrows World - beoresetting up the successul corporatecommunications agency The RocketScience Group. Hes now a partner inthe web TV platorm Watering Holeand is involved with helping mediacompanies raise unding through theCoalition Partners investment group.In whatever spare time he has let,David is also a magistrate and he even

nds time to edit his own investmentnewsletter called PortolioReview.

David Stevensoninetent Cont

Financial Times

sTrucTurEdhow ETF e


5/28

London stock market listed exchange traded

und (also known as an ETF). Just to conuse

matters there are other und and productstructures with even more exotic acronyms

which well examine in a later article but or

our purposes they are all simply index tracking

unds o one shape or another.

Whatever und structure you choose, as an

investor you are simply buying the market

via an index. When compared to a traditional

active und manager such as an investment

trust there are three big dierences.

The rst and most important is that youve

decided to dispense with the services o a und

manager who will actively manage your

investments based on their own views about

the relative risks and rewards o a company in

an index such as the FTSE 100 or S&P 500. That

opens up the investor in an index tracking und

to a very specic risk which is that the index

they are tracking might be ull o absolute junk

i.e. over-priced stocks that the market has

chased up in value to ridiculous prices.

But in dispensing with the services o an active

und manager, our ETF investor has also avoided

a big risk, which is that the active und manager

has made wrong decisions about the companies

they pick. Academics have endlessly studied und

manager returns over the last 50 years and

theyve concluded that most und managers dont

outperorm the benchmark index such as the

FTSE 100 and the S&P 500. With index tracking

unds you are simply buying whatever the wider

market is choosing to buy (as measured by an

index) and doing away with the idiosyncratic

risks o opting or an active und manager.

Last but by no means least by investing in a

und that is passively managed (we use the term

passive because there is no active und manager

but simply a plan to methodically buy whatever

is in an index) you are cutting your costs very

substantially. Many investment trusts still charge

more than 1% per annum or their active

management, whilst more than a ew unit trusts

charge well over 1.5% per annum. ETFs and

index tracking unit trust unds rarely ever charge

more than 1% per annum, with most charging a

good deal less than 0.5%. That extra 1% o costs

charged by active managers can add up to a

huge amount over 10 or 20 years.

What should become apparent is that the

decision to invest in an index tracking und like

an ETF is like anything else in the world o

investment there are some specic risks which

well talk about later in this article but also somebig positives, namely lower cost, and doing away

with the risk o trusting a und manager to make

lots o (hopeully protable) trading decisions.

More and more investors here in the UK are

choosing to make use o ETFs and other index

tracking unds as part o their diversied

portolios. The key is to understand exactly

what you are buying into.

inetng n the TsE 100 index

Lets imagine that you have decided to invest in

the worlds leading blue chip equity index, whichis the American Standard and Poors 500 index.

For whatever strategic reason youve decided

that this benchmark index gives you the right

exposure to the worlds leading, prot making

companies. Youd thought about investing in

the big stocks within the index outts like

Apple and Exxon but you decided that you

wanted more diversication and didnt want to

take the risk o picking the wrong stocks.

Which ETF to invest in? There are, as you can

imagine, dozens o S&P 500 trackers, issued by

a multitude o large banks and undmanagement groups. You decide or right or

wrong to invest in the biggest o them all, in

act probably the largest ETF on the planet.

This is an American listed ETF with the

New York ticker SPY and it is managed by

a huge und management company called

State Street.

what nde the ET?

What does the und actually invest in? As you

might expect, SPY invests in the constituents othe S&P 500 benchmark US index. In the table

below State Street has listed the top ten

holdings within the index tracking und, with

amiliar names such as Apple, Exxon and

Microsot topping the list. Needless to say there

are another 490 stocks above and beyond these

top ten holdings. Youll also see that against

company is its weight within the index in the

SPY und, shares in Apple comprises 4.8% o

the total value o the und. I we were to look at

the composition o the index, there would be

almost no dierence whatsoever the contentso the ETF would track (almost perectly) the

composition o the index.

5How ETFs are Structured | EXCHANGE TRADED

Wteve

tte yoooe,

veto yo e

mply by

te met v

e.


6/28

Physical tracking or replication is ne i one is

tracking a very broad, very liquid, well known

index such as the S&P 500 or the FTSE 100.These indices contain dozens o well known

names traded in the worlds leading equity

markets, where there are literally tens o

thousands o proessional institutions

operating on a real time basis.

But some indices arent quite as liquid, or

ecient. These indices might track, or

instance, Indian equities or track a very

specialised bit o the UK mainstream equity

space such as small cap emerging market

stocks that pay a high yield. Within these

specialised indices there may be all mannero complications or whatever reason,

physically tracking a specialist index might

be a tad more complicated than tracking the

FTSE 100. This neednt prevent a und

provider rom setting up a physical index

tracking und, but their management costs

might be a little higher. Also we might

begin to start worrying about something

called the tracking error.

This complex sounding term is actually

very simple to understand as it involves

measuring the returns rom the underlying

index against the returns rom the und. In

some cases a big dierence o as much as 1% a

year might emerge. There are many reasons

why this tracking error might emerge, not least

those bigger management ees, but the net

eect can be drastic. Imagine i your ETF was

tracking an index and was supposed to have

returned 5% last year but the und actually

only returned 3.5% in this example our

tracking error is 1.5%.

Top ol sPY e te*

undertandng the tracng trctre

How do the passive managers o this und pull

o this tracking? The simple answer is that they

use lots o computing power to make sure that

they constantly track the index via their und,

plus an active trading desk. I the price o a stock

declines by 10% in value on one day, bringing

its weighting within the index down rom say

4.85% to say 4.4%, the und managers at an ETF

sell their holdings o this stock to make up the

dierence and vice versa. The key to this

particular index is that the managers arephysically replicating the index i.e. i it says its

in the index, the und managers make sure that

those actual physical shares are in the und. That

physical tracking is the norm in the US market

and is very common here in the UK.

The nthetc tracer aternate

But there is a newer alternative which involves

a novel twist, called the synthetic tracker.


...we mt

be to ttwoy bot

omet

lle te

t

eo...

nme Wet (%)

Apple 4.80%

Exxon Mobil 3.20%

Microsot 1.80%

International Business Machines 1.79%

Chevron Group 1.73%

General Electric 1.73%

AT&T 1.68%

Johnson & Johnson 1.46%

Procter & Gamble 1.43%

Wells Fargo & Co 1.43%

* As o 21/8/2012


7/28

Ho doe a snthetc Tracer or?

All this talk o tracking error and less liquid

indices has spawned a rival to the physical

replicating index tracking und. This is called

the synthetic tracker und and in essence

there is just one crucial change.

A synthetic tracker und ollowing the FTSE

100, or instance, might do everything the

same as its peer which uses physical tracking

(or replication) but with the synthetic und,

its core holdings wont be the stocks inside

the actual index but what is essentially an

IOU. The issuer might be a large investment

bank that already holds all those stocks within

the S&P 500 as part o its normal trading

portolio. The banks trading desk simply

issues an IOU to the und which says that

theyll promise to pay out on the return rom

investing in the index. As collateral theyll

issue what is called a swap (a kind o

complicated IOU) which is that promise

(measured against the return rom the index)

as well as collateral to back up the promise or

contract. That collateral can come in many

dierent shapes and sizes and could be

whatever stock the bank holds within its

trading portolios at the time.

How does this IOU work? For arguments sake

lets imagine that our synthetic tracker is

ollowing the FTSE 100 over the next year. The

und starts with a market cap o 100m when

the FTSE 100 index is at 5,000. One year later

the index has gone up by 10% and the index

level is now 5,500. Our und should now be

valued at 110m.

Behind the scenes the value o the swap and the

associated collateral backing up this return has

simply increased rom a total o 100m

(probably comprising 90m in collateral and a

10m swap contract) to 110m (99m in

collateral and 11m swap contract). The beauty

o this synthetic tracking is that there need beno tracking error whatsoever and the issuer can

also underwrite to pay out the total net return

including dividends (once tax has been

accounted or). Costs might also be substantially

lower as a result and crucially, this synthetic

swap is very ecient in dealing with less liquid

markets such as Indian equities.

The downside o a synthetic tracker should be

immediately obvious. The investor is taking a

risk with that IOU. It is in essence a gamble on

the credit worthiness o the bank issuer, which

introduces the concept o counterparty risk.The bank will do its utmost to mitigate that risk

or you, by oering up that collateral. The

regulators will also probably orce the bank and

the issuer to limit that exposure to the swap

contract to 10% at most o the value o the und.

But there is no getting away rom the act you

are taking a risk. As an investor you need to

balance the potential reward o lower tracking

errors, access to new markets and lower expenses

with the downside o counterparty risk. The

debate between physical and synthetic tracking

has become very heated in recent years and

many investors have what can seem like an

irrational distrust o synthetic ETFs. There are

pluses and minuses or both orms o tracking

investors simply need to understand the risks

and make a considered judgement.

7How ETFs are Structured | EXCHANGE TRADED

a veto

yo ee to

ble te

potetl

ew o

lowe t

eo, e

to ew met

lowe

epee wt

te owe

o otepty

.


8/28


yor chect or ng ET

i t ee te o t tt?

This is perhaps the most basic issue or many

private investors. Most o the index tracking

unds on oer are shares based unds that are

listed on an exchange, and thus the acronym

used to describe them starts with an E, as in

exchange. That means youve got to buy and

sell through a stockbroker, who can deal in

real time although there will also be a bid

oer spread between the asking and selling

price. Many investors dont have accounts

with stockbrokers but use an adviser whomight not even have access to a dealing

platorm. I this is the case theyll probably

use an index tracking unit trust und or OEIC

where the und is structured in almost exactly

the same way as an exchange traded und but

with dealing on a daily basis.

cotepty ow b poblem t?

Exchange traded notes and certicates have

an obvious risk they are in eect an IOU

by a large nancial institution, a orm o

securitised derivative. But that risk can alsobe overstated and can blind investors to the

advantages o using synthetic replication.

Investors also need to remember that all

listed products unds, notes and certicates

are not covered by the Financial Services

Compensation Scheme (FSCS). Invest in

any exchange traded und at your own risk

the government will not bail you out.

sto Le tvty ow m oe

o wo beet?

I you do invest in a physical tracker youllprobably be condent that your counterparty

risk is very low, as your und manager owns

that big basket o shares you are tracking. But

there is another risk that you need to be aware

o based around something called stock

lending. Those physical baskets o liquid

assets represent a real opportunity or a

sophisticated organization like iShares and

its parent Blackrock why not lend out the

share and bond certicates within its portolio

or limited periods o time to external

organizations who might to borrow them?

The borrowers are likely to be hedge unds

or bank trading desks who might have a

particular view on a company (bearish or

bullish) and want to make a quick prot by

speculating on stocks and bonds they dont

actually own. The borrower o stocks andbonds in an iShares ETF portolio will

obviously have to pay a ee or the duration o

the loan. Theyll also lodge collateral in

return which can amount to as much as 145%

o the value o the loan in some isolated cases

and more than 100% o the value o the loan

in nearly all other cases.

Stock lending is a perectly acceptable practice

many actively managed unds also engage in

securities lending nevertheless there is still

potential or concern with this stock lending.

What happens i the borrower o shares in theund goes bust? How easy will it be to grab

back and sell any collateral oered up by that

borrower? Yet its also important to note that

this stock lending is careully managed and

monitored you need to make your own

decision i you are happy with the procedures

and the collateral on oer.

how lq te ETF?

ETFs have become very popular in

Europe, with trading volumes exploding in

recent years. But that liquidity can also be acurse as markets stress or liquidity seizes up.

Markets-makers may choose to expand the bid

oer spread on lightly traded ETFs to

unacceptable levels these spikes in bid oer

spreads can also move around on an intra day

trading basis. These excessive bid oer spreads

also point to a bigger challenge exchange

traded products o all shapes and sizes may be

the big new thing in Europe but that listing

activity hasnt always translated through into

actual action on exchange many European

ETFs, or instance, boast low Average Daily

Volume (ADV) numbers.

it mpott to ote

tt t to le elly me

motoe yo ee to

me yo ow eo

yo e ppy wt

te poee te

olltel o oe.

Opinions expressed are those o David Stevenson, not

Alliance Trust Savings Limited. Please read the

important inormation at the end o this publication.


9/28

rank Asst

1. iShares FTSE 100

2. ETFS Physical Gold

3. iShares S&P 500

4. ETFS FTSE 100 Super Short Strategy

5. iShares Markit iBoxx Corporate Bond Ex Financials

6. iShares Index Linked Gilts

7. iShares Markit iBoxx Euro Corporate Bond

8. iShares Markit iBoxx Corporate Bond

9. iShares Physical Gold

10. iShares treasury Bond 1-3

11. db X-trackers FTSE 100 Short Daily

12. iShares Dow Jones Emerging Markets Select Dividend

13. iShares $ Emerging Markets Bond

14. ETFS Physical Silver

15. iShares FTSE UK All Stocks Gilt

16. iShares FTSE 250

17. iShares FTSE UK Dividend Plus

18. db X-trackers MSCI AC Asia ex-Japan

19. SPDR Euro S&P $ Dividend Aristocrats

20. SPDR Euro S&P Dividend Aristocrats

9Top 20s | EXCHANGE TRADED

Te FTop 20

ExchangE

The table conrms the purchases o investors at that time; no reliance should be placed on the position

o any company in making any investment decisions. The rankings are based on the value o all

purchases made by Alliance Trust Savings customers in the Select SIPP, ISA and Investment Dealing

Account. Alliance Trust Savings does not provide advice. I there are any terms you are unamiliar with

or you are unsure o, you may wish to seek nancial advice.

ake a look at which Exchange Traded Funds Alliance Trust Savings customers bought

between 1 January 2012 and 31 October 2012.T


10/28

EXCHANGE TRADED | HSBC Global Asset Management

t a broader level, emerging nations have undoubtedly

risen like a phoenix rom the ashes o their own disasters,

such as the Russian nancial crisis o 1998. Today,

emerging markets are the engine o global growth; while Western

economies stagnate, countries such as Brazil, Russia, India andChina (termed BRICs) continue to grow. At HSBC, we believe that

these economies are likely to be the driving orce o the new global

economy. In our opinion, they oer attractive investment

opportunities, or the ollowing reasons.

First o all, the BRIC economies have, to varying degrees, shown

rapid economic growth, increasing market size across all sectors.

They also have a burgeoning middle class, providing a rich source

o potential consumption. Each o the BRIC countries also has

multiple and dierent attributes and, thus, each is distinct.

Brazil, the th-largest country by area and population in the

world, has a wealth o mineral reserves and a ocus on energy

resources, commodities and agriculture.

Russia is the worlds largest country in terms o territory, with a

consumer market o over 140 million people, vast natural

resources, a highly educated workorce, and technologically

advanced research and production capabilities.

AT A TimE wHEN DEvElOpED

mARkET COuNTRiEs sEEm TO

bE OREvER EmbROilED iN

DEbT CRisEs, HiNDERED bylACklusTRE ECONOmiC DATA

AND bEsET by vOlATilE EquiTy

mARkETs, THE EmERGiNG

mARkET blOC CONTiNuEs

TO sHOw REmARkAblE

REsiliENCE. iN TRuTH, A NEw

wORlD ORDER sEEms NOw

TO bE ORmiNG, wiTH THE us,

ONCE THE uNDispuTED kiNG

O THE GlObAl ECONOmy,

sEEiNG iTs CROwN bEiNG

slOwly usuRpED by CHiNA.

gowt popet

met e tll t

A

Which MarkETs T

10


11/28

11HSBC Global Asset Management | EXCHANGE TRADED

eme

India has the second-largest population in the world with

a young and vibrant workorce. The Indian economy benets

rom specialisation in services, outsourcing, technology and

pharmaceuticals.

China, with 20% o the worlds population, is the most

populous in the world and has raced up the GDP ladder in

the last decade. Indeed, China is one o the astest-growing

economies in the world with an annual growth rate in excess

o 10% over the last 30 years. In early 2011, it surpassed Japan

as the second largest economy and seems set to replace the USA

by as early as 2020. It is already the worlds largest exporter o

goods and is a leading global manuacturer across a wide range

o industries, acilitated by its abundant labour resources.

The our countries also complement each

other. China, as one o the leading

manuacturing countries in the world, depends

on the importation o commodities and energy

rom Brazil and Russia. Meanwhile, India

provides the IT services that make it possible to

optimise the use o new technology. The

continued requirement o commodities rom

Brazil and Russia will help boost the economies

o both countries. Meanwhile, India and China

have beneted rom the recent global economiccrisis, as they are net importers. Overall, these

actors make the BRIC bloc compelling rom

an investment standpoint.

At HSBC, we have a number o products that

aim to take advantage o these opportunities.

We have recently launched a renminbi xed

income und, which aims to allow investors

to gain exposure to the renminbi, Chinas

currency, and to benet rom its potential

appreciation via investment in the oshore

bond market.

We also believe that Russia is o particular

interest and, in July 2011, launched the rst

physically replicated Russian ETF in Europe.

ETFs are attractive as investments not only

because o their low costs, tax eciency and

stock-like eatures but also because they

provide investors with a way o tapping into less

accessible markets. HSBCs physically replicated

Russian ETF tracks the MSCI Russia Capped

Index, which represents the top 85% by market

capitalisation o listed companies in the Russian

investable equity universe. The tracking o this

index ensures the ETF is highly correlated with

the Russian market. Furthermore, the und has

so ar has delivered better tracking-error

dierence than most swap-based ETFs since its

launch date. By harnessing all o HSBCs

capabilities, we have been able to manage both

Russian equity and broader emerging market

ETFs on a physical and competitive basis that

are o high quality and good value.

Furthermore, BRIC countries have compelling long-term

growth potential. The sustained growth o BRIC economies

has been based on a combination o demographic actors,

increased industrialisation and a wealth o natural resources.

The pace o growth has seen their international signicance

increase rapidly, challenging the traditional economic

dominance o developed markets. Recent growth has been

driven by domestic rather than export demand, reducing

BRIC reliance on their developed markets trading partners.

The outlook or BRIC nations is also promising. Growth rates

in the BRIC countries are widely expected to exceed those o

western markets, especially China and India. Their stronger

outlook has been a key reason or the large investment

infows seen in recent years.

This article has been issued and approved by HSBC Global Asset Management.

The value o investments and any income rom them can go down as well as up and investors may not get back the amount

originally invested. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent

in some established markets. Stock market investments should be viewed as a medium to long term investment and should be held

or at least fve years. The article is or inormation only and does not constitute investment advice or a recommendation to any

reader to buy or sell investments. The views expressed were held at the time o preparation and are subject to change without notice.

FOcus On


12/28

he process really is the same as prior to

purchasing any investment and the key is always

do your research. Why? As well as being aware

o the potential benets o any investment you have to be

ully aware o the risks and how much risk you wish to

take. Only by conducting thorough research can you

make an inormed decision, ully aware o the risks and

understand how much risk you are willing to take o both

the risks and benets o the underlying investment.

At Alliance Trust Savings we understand the value

o research in the investment decision process. We oer

all our customers ree access to research services rom

Morningstar, a recognised player in investment research

expertise and acilitation. You can access inormation

rom Morningstar on our website by clicking on the

Investment Selector tab at the top o our home page and

then ollow the instruction on that page which will take

you to the tool itsel, or alternatively it is available when

you login securely to your account.

In terms o ETFs and ETCs Morningstar holds a wealth

o inormation or you to consider.

By clicking on the ETF tab (see table 1), you are taken to

the main Morningstar page which contains a snapshot

o inormation. This page is your hub to access more

detailed inormation on the ETF/ETC o your choice.

The snapshot page is a good way o nding your eet

and allows you to search by category i youre interested

in a particular sector.

By using the drop down menus you can look at specic

ETF companies and their sectors such as Emerging

Markets or Commodities. Once you have selected a

company you can view a particular investment by

simply clicking on the investment name, which will

then provide access to more detailed inormation on

your chosen investment. You can also use the search

box and input the ETF name or Investment Symbol to

nd a specic investment. Once you have selected your

chosen investment you can view inormation via the

navigation on the let hand side (see table 2).

In the next section o this article we will look at how

you can purchase an ETF online with Alliance Trust

Savings. I you decide to purchase an ETF or ETC with

T

12 EXCHANGE TRADED |Alliance Trust Savings

yOu mAy bE CONsiDERiNG wHAT THE NEXT sTEps ARE bEORE

DECiDiNG wHETHER OR NOT TO bECOmE AN ET/ETC iNvEsTOR.

how to by ETF o ETc wt

aLLiancE TrusTsaVings

1. Ovevew Provides high level inormation

including Morningstar category, perormance history,

key stats, ISA eligibility and Inception Date.

2. ct Growth o 1,000 across dierent

time rames

3. Peome Perormance history tracked

against an index. Also gives annual, trailing and

quarterly returns

4. r t Morningstar risk rating

measured against category and return/risk analysis

5. Potolo Includes inormation on market cap,

prospective earnings, dividend yield actor, historical

earnings growth and asset allocation. ETFs/ETCs

invest in specic sectors and thereore asset allocation

will typically be 100% equities or example within a

specic region or 100% in a specic region.

6. Memet Contact inormation o the ETF/

ETC provider. Domicile, Legal structure, and whether

or not the investment is a UCITs is also covered in

this section.

7. Fee Includes any ees and expenses that you

will incur when buying into an ETF.

sde ar en ro tae 2 (oote)


13/28

Morningstar ToolsMorningstar Fund ReportTM

db Physical Gold ETC XGLD

Performance History Key Stats

Benchmark

Growth of 1,000 (GBP)

962

Category: Commodities Precious Metals

Index:

Fund - - - - - 12.1 5.8

YTD 5.84 -

Fund +/-Idx

3 Years Annualized - -



12 Month Yield 0.00

Fund Benchmark

Morningstar Benchmark

London Fix Gold PM PR USD

-

Tax Year Return 15.78%

+/- Cat - - - - - 15.0 3.6

+/- Cat - - - - - - -

1,036

1,1101,184

1,258

1,332

1,406

31/10/2012

Trailing Returns 31/10/2012

Overview

Chart

Performance

Risk and Rating

Portfolio

Management

Fees

Print

Glossary ?

Investment Information

2008 2009 2010 2011 2012

Morningstar Category Morningstar RatingTM

Commodities Precious Not RatedMetals

IMA Sector ISIN- GB00B5840F36

ISA Exchange NameNo LONDON STOCK

EXCHANGE, THE

NAV 30/10/2012 Day ChangeUSD 169.81 0.64%

Total Net Assets (mil) Total Expense Ration- -

Annual Management Inception DateFee 15/06/20100.29%

Screens or illustration purposes only. Source: Morningstar

Alliance Trust Savings you will be asked to

conrm that you have read the relevant Key

Investor Inormation Document (KIID) beore

completing the purchase. The KIID is really

useul and provides important inormation. The

good news is that you can access KIIDs againthrough the Documents tab o Morningstar.

The inormation contained within the KIID is

required by law to help you understand the

nature and the risks o investing in the ETF/

ETC. A KIID will only be provided where the

investment is classied as a UCITs.

There is much more inormation available and

too much to cover here Why not log into

your account today and nd out more?

Ho to rchae an ET/ETC th

Aance trt sangOnce you have completed your investment

research and decided on which ETF/ETC to

purchase the easiest way to complete your

purchase is online using our secure trading

platorm. To purchase an ETF or ETC ater

logging in click on the Trading Centre tab

and then click trade now. It is important to

note that you cannot purchase an ETF/ETC

within the und supermarket. I you have

ever purchased an equity with Alliance Trust

Savings online the process is exactly thesame or ETFs/ETCs.

To help you we have produced a list o all

the ETFs/ETCs available on the Alliance

Trust Savings platorm and importantly the

Investment Symbol that applies as you will

need this or any purchases or sells. This

ull list is available within the orms and

documents section o our website under

Formal Documents. This list will also help

you with your Morningstar Research as

some investments displayed on Morningstar

are not available on our platorm.

We hope you have ound this short guide to

ETF/ETC research helpul. Our website has a

range o how to videos one o which is about

purchasing an ETF or ETC online why not

check it out? Happy investing.

The value o investments

and the income rom them

may go down as well as

up and you may not get

back the original amount

you invested.

I you are unsure whether an

investment is right or you,

or you are unamiliar with

the terminology, you should

seek proessional advice.

Past perormance is not a

guide to uture perormance.

Garry joined Alliance Trust

Savings in October 2010.

His role is to manage the

Alliance Trust Savings product

and marketing strategy.

Contact:

For more inormation, please

visit our website

alliancetrustsavings.co.uk

Garry Mcluckiemaretng Drector

Alliance Trust Savings

13Alliance Trust Savings | EXCHANGE TRADED

News/Commentary

Snapshot

Name

PowerShares FTSE RAFI All-World 3000 Fd GBP Global Flex-Cap Equity Not Rated 6.01 0.50 846.75 GBX

PowerShares Dynamic US Market Fund US Large-Cap Blend Eq... 10.93 0.75 568.13 GBX

PowerSharesEQQQ Fund GBP US Large-Cap Growth E... 11.28 0.30 4,036.00 GBX

PowerShares FTSE RAFI AsiaPac x-Jpn Fund G... Asia-Pacific ex-Japan E... Not Rated 12.92 0.80 468.15 GBX

PowerShares FTSE RAFI Dev 1000 Fund GBP Global Large-Cap Value... 5.00 0.50 743.13 GBX

PowerShares FTSE RAFI Dev Eur Mid-Sm GBP Europe Mid-Cap Equity 10.79 0.50 715.00 GBX

PowerShares FTSE RAFI EmergingMrkts Fund... Global Emerging Market... Not Rated 3.34 0.65 552.50 GBX

PowerShares FTSE RAFI Europe Fund GBP Europe Large-Cap Valu... 7.83 0.50 564.63 GBX

PowerShares FTSE RAFI Hong Kong China Fd... Hong Kong Equity Not Rated 18.92 0.55 1,282.00 GBX

PowerShares FTSE RAFI UK 100 Fund UK Large-Cap Value Eq... 10.24 0.50 908.88 GBX

PowerShares FTSE RAFI US 1000 Fund GBP US Large-Cap Value Eq... 7.03 0.39 631.88 GBX

PowerShares Global Agriculture Fund GBP Sector Equity Agriculture 6.44 0.75 747.75 GBX

MorningstarCategory

MorningstarRatingTM

YTDReturn

TotalExpense

LastClose

Search

Morningstar Tools

Enter name, ISIN or ticker

Short Term Performance Portfolio Fees & Details Documents

Funds UK Equit ies Int. Equit ies Investment Trusts ETF Search

% Ratio%

ETF Quickrank

Investment Information

Invesco Powershares Capi tal Mgmt LLC All Morni ngstar Categorie s

Enter name, ISIN or ticker

1

2


14/28

DAviD sTEvENsON CHAiRs A

DisCussiON AbOuT EXCHANGE

TRADED uNDs wiTH A pANEl O

EXpERTs: NiCk blAkE, JOsE GARCiA-

ZARATE AND mANOOJ misTRy.

Dad: wh od ordnarnetor net n ndex-tracngnd? wh od the not go oand net n netent trt or atandard nt trt?

Joe: I think one o the key things about the

philosophy behind passive investment, is

acknowledging the inability o active managers

to comply with their objectives. There are a loto studies that show over the long term, that

active managers are unlikely to ull their

investment objectives.

14 EXCHANGE TRADED | Round Table

rOundTaBLE

This round table event was lmed at the Tate Modern,

London on 5 September 2012. To view the ull discussion

visit alliancetrustsavings.co.uk


15/28

This is not a question o actually saying that the

active managers are not good at what they do, or

that the rationale behind picking a certain stock

or a certain bond is not correct at the time, its

basically measuring the perormance over a long

term period which is what investors should be

interested in.

Dad: what hod netor reaoc on?

Mooj: When you look at an ETF it is

essentially the index-tracking und listed on an

exchange and it trades like any other listed

security so in the same way as with an

investment trust you buy it on the exchange

through your broker you can do the same withan exchange traded und. From a regulatory

perspective ETFs are regulated as any other

OEIC or unit trust, they conorm to whats

called the UCITS Regulations a pan-European

set o regulations that govern unds across

Europe and youve also got the other ETPs

Exchange Traded Products categories out there

so youve got Exchange Traded Commodities

which are known as ETCs and typically these

will give you exposure to single commodities or

a basket o gold or oil or example and then you

also have other products called ExchangeTraded Notes and these tend to be linked, once

again could be linked to commodities but could

also be linked to strategies such as volatility.

I you look at it rom a regulatory perspective

an ETF is the most highly regulated product,

an ETC is basically issued by a special purpose

vehicle and it trades like a security on the

exchange and an Exchange Traded Note is

typically a debt security issued by a bank.

Dad: One o the ot hocngthng that the aerage ee charged aerage nd n brtan actagong not don oer the at eear and that acro the entrenere o nd, t ho do ET ornt trt coare n ter o cot?

n: Thats the challenge or investors, its

knowing in advance who will beat the indexand thats the real challenge. Now, as to the

dierent types, certainly in our view an

Exchange Traded Fund, an index exchange-

traded und and a mutual und is actually the

same vehicle, its just a dierent way to buy

the same exposure in that way, typically

investors would nd that an index und or an

ETF would typically be much lower cost than

an active und and thats because active unds

put a lot o eort into research trying to

outthink the market, trying to do the deep

research to understand how they mightout-perorm the market, an index und isnt

trying to beat the market, it just buys or

example everything in the FTSE 100.

15Round Table | EXCHANGE TRADED

Nick Blake is Head o Retail. He is responsible or overseeing development o

Vanguards und range or the UK and European businesses and the distribution

to our key retail audiences o Financial Planners, Wealth Managers and Asset

Management Companies. Nick joined Vanguard in 2009 ater a long career with

a leading UK Lie Oce where he held senior positions in distribution, and morelatterly as a key member o the team delivering a successul Wrap platorm.

Jose Garcia-Zarate is a senior ETF analyst or Morningstar, covering European ETFs.

Beore joining Morningstar in 2010, Jose spent seven years as a senior European

sovereign bond market strategist or 4cast, a London-based consulting rm. Prior to

4cast, he was a macroeconomic analyst and Eurozone sovereign bond markets analyst

or S&P MMS. Jose began his career as an analyst intern or Spains Economic Ministry,

working in the external trade department in the ministrys USA oce.

Manooj Mistry is UK head o db X-trackers, Deutsche Banks exchange traded

unds (ETF) platorm. Manooj joined Deutsche Bank in 2006 having previouslyworked at Merrill Lynch International, where he was responsible or the

development o LDRS ETFs, the rst ETFs to be launched in Europe. Manooj

graduated in economics and business nance rom Brunel University.

Nick BlakeHead o Reta,Vanguard

Jose Garcia-Zaratesenor ET Anat, Morningstar

Manooj Mistryuk Head o d X-tracer, Deutsche Bank

Te lleeo veto

owwo wll bette e.

Nick Blake


16/28

Dad: Ho ch odan aerage ndex-tracng

one charge?n: The usual sort o apples and apples

comparison trouble here is that some o

the active unds include commissions

and ees in them whereas many index

unds dont pay commission and ees

but on a like or like basis an index und

would typically be hal a percent to

three quarters o a percent cheaper than

an active und in general and as you say

the compound eect o those charges

could be quite signicant.

Joe: We ran a study at Morningstar

about the implications o high

management ees and it is astonishing

how much o your long term returns

can be eaten away by paying

management ees. At 1% or 2% this

doesnt sound like a lot, but this is

compounding year ater year.

Mooj: Its very much like what we see

is that ETFs give retail investors the same

tools as institution investors have,

institution investors have been using

passive products or many years.

Dad: becae a ot o eoehae enon nd, odenon nd ae e ondex tracng?

Joe: They do because this is one o the

key industries where you really need to

make sure that the stream o revenue is

more or less secure and it is one o the

key reasons why I think the ETF marketis actually kicking o with some

important growth rates in places like

the UK where you have a very

important pension und industry.

Dad: what are the nd othng that eoe are ngot there at the oent?

Joe: Well lately its been about a search

or yields and trying to nd the saest

investments. So, you have the xed

income space gathering a lot o

investors interest, and you have a

commodity space o the ETFs.

Gold is purely a sae haven strategy borne

out o the uncertainty in the global

economic picture and people are lookingto protect capital. Its not so much that

theyre seeking to have positive returns

but at least preserve the capital and on

the xed income space you see a lot o

interest in corporate bonds

Mooj: The reason why you can oer a

single commodity exposure to something

like gold is that the vehicles that the

products are issued by are vehicles that

arent as regulated as unds, they are

regulated as special purpose vehicles

which have the opportunity to issue debtor securities linked to one asset so theyre

not subject to the same diversication

rules you have in unds.

Dad: so there a tte trer n ther trctre.

Mooj: Yes but a lot o these products

or example the gold products are called a

whole physical gold, tobacco products.

Dad: it ght e aer noe reect.

Mooj: What you typically see with an

exchange traded commodity is that gold

is held in a vault somewhere backing that

investment so these products are backed

by the actual gold bars sitting somewhere

so these products are what I would call

collateralised or asset backed theyre

physically backed by assets.

dv: And thats a crucial thing

because when we talk about

commodities in act you sort o have to

go down that route dont you because

quite oten theyre either physical

holdings or theyre utures or theyre

done on options exchanges so they cant

be held in the traditional way that an

equity und would hold, you just cant

do it that way can you so thats the

reason theyve done it that way.

Dad: what the g derencen th hca er nthetc

deate, hat gong on there?it doe ond er conngor an o .



17/28

...t

toow mo yo lotem et be etewy by memet

ee ye teye...

Joe: I think the rst thing is to dene is what is

a physical and what is a synthetic und. Physical

is pretty easy to understand. The und is eithergoing to hold all the components o the index or

a subset o the components o the index.

Synthetic providers or synthetic ETFs deliver the

return o the indices via small contracts.

The key dierence obviously in the structure is

that a synthetic ETF will always have a counter

party risk, thats the nature o the structure

because a counterparty, typically that is when an

investment bank will have to provide the return

o the index and there is always the risk even

though theoretical that the bank will not be

able, or whatever reason, to provide that return.

Dad: manooj o do nthetco jt ta throgh ho otrctre a nthetc nd.

Mooj:Jose has explained the rst part in terms

o how the und works, the und is entering into a

contract with a bank to deliver the underlying

index perormance then as part o that contract

the und also needs to receive some physical assets

so this physical collateral is there to basically oset

the counter party exposure. The amount o assetsthat need to be delivered or posted with the und

is determined by the regulations, by the UCITS

Regulations I mentioned earlier so as a minimum

a und must at least have 90% assets.

In many cases in the ETF industry many

providers are actually doing what is called over

collateralisation so theyre actually assets greater

than the value o the und so these are basically

an element o a cushion o security there.

Dad: To the otde oererho ed to tradtona ndtrctrng, hat are theadantage o dong t th a?

Mooj: The advantages o synthetic

replication or swap based replication is that youcan deliver the index perormance without any

tracking error / dierence. This means that you

can guarantee that your returns will be the FTSE

100 index minus the management ees.

Dad: And to ndertand thetracng error, t er an deahch that o a ore gong totrac the TsE 100 and t trn n10% one ear and o on trn n9%, or tracng error e 1%.

Mooj: 1% yes and some o that 1% willobviously be the management ee but there could

be additional tracking error on top o that.


Jose Garcia-Zarate


18/28

Dad: so Nc o do a hcaaroach and that ort o doe hatt a on the ct tn rea o the TsE 100, o thench o toc n the TsE 100,hat are the adantage o that

aroach do o thn?n: Both methodologies (Synthetic and

Physical) achieve the same outcome or

investors and both are covered by the European

UCITS Rules. Our preerred approach is

physical, we like to own the securities and

deposits that are there backing up the return or

investors. One o the challenges with physical

is, as the unds get broader, so lets say youre

trying to track a more global index.

Dad: yo hear thng e themsCi word.

n: Correct, and that might require you to

own thousands o stock.

And there could be a point o ineciency

where trying to own a very small amount o a

very obscure opportunity means its

inecient or the und manager to own that

so whilst most physical managers will get as

close as they can to the index and a really

good one will do very well there you could

start to see small amounts o tracking error

occur so really the trade-o or investors hereis with synthetic you get a certainty o return

because you have the promised return but

have counter party risk versus no counter

party risk with physical but potentially a

slight tracking error and a good adviser and

good investors really look or weighing o

those trades around counter party risk versus

perect tracking.

Mooj: You can get counter party risk with

the physical replication to a certain extent

Dad: Ho doe that or? ieheard thng e toc endng, hatgong on there? what that a aot?

Joe: There could be counterparty risk in

physical unds.

Dad: Ho doe that or, re Nc ha h 100 toc, h TsE100 he got the n h ae andhe ha the certcate, hat

rong th that then, hat codgo rong there?

Joe: The thing that could go wrong is that i

he decides to actually lend those 100 securities

to other parties then obviously you create an

element o counterparty risk in the sense that

those other parties might not return the

securities to the und. Not all physical unds

engage in securities lendings but a lot do.

Dad: what an nteretng area

ot there that netor hod jtee an ee on, here there a oto actt gong on?

Mooj: I think what were seeing is that with

ETFs retail investors have the same tools as



19/28

institutional investors have and what weve

already seen is a number o institutional

portolio managers using products like ETFs and

index unds in their portolios and theyre

using these products to do asset allocation so

rather than choosing individual stocks or

bonds, theyre actually deciding OK I want

exposure to a particular market or asset class.

n: The thing Im most pleased with actually

is not so much in the strategies themselves but

more in the access that investors have to these

strategies so there was a time when low cost

products wouldnt be carried by many o the

platorms out there because quite rankly they

didnt pay a commission being very low cost so

investors really only had the choice o some

relatively expensive unds and things like

investment trusts or ETFs or no load mutual

unds typically wouldnt be carried but one o

the developments Im delighted to see more

orward thinking platorms like Alliance Trust

are making the access to these vehicles ar

wider now than has ever been beore so

investors have got ar more choice and theyve

also got choice in how they index so in many

ways an ETF is just another way to index like a

mutual und but how they index can also have

an impact on cost as well, accessing these

through a stock broking platorm might be a

cheaper way to go than accessing them

through a traditional unds platorm and

investors should think about not just the cost

o the und itsel but also the cost o ownership

o the und just as much because both o those

costs will erode their returns over time so one

o the things Im delighted to see is just the

broader access to these vehicles, better

disclosure, more transparency just so that

investors have a ar more inormed way o

looking at their portolios.

Joe: Perhaps it is the pending revolution or

the ETF market, the accessibility and the

extensive use o Exchange Traded Products bythe retail community. I think that socially the

conditions are right or an increased

participation o the retail community because

people have to save money or things such as

pensions and university costs.


This article is or inormation only. The views stated in the discussion are those o

the panel members at the time, and not Alliance Trust Savings Limited. Please read

the important inormation at the end o this publication.

Investments can down as well as up and capital is at risk so that investors may

get back less than they originally invested.

Investments in emerging markets may involve a higher element o risk due to less

well-regulated markets and political and economic stability. Exchange rate changes

may cause the value o underlying overseas investments to go down as well as up.

Whilst care has been taken in compiling the transcript o the discussion, no

representation or warranty, express or implied, is made by Alliance Trust Savings

Limited as to its accuracy or completeness.Nothing contained in this transcript o the discussion should be construed as

being an invitation or inducement to engage in investment activity. No advice is

given by Alliance Trust Savings Limited. For advice on investing, please consult an

independent fnancial adviser.

...vetove ot

moe oe, lo ow teye...

Nick Blake


20/28

iNvEsTORs CAN usE ETs TO builD ACTivEly mANAGED pORTOliOs,

OR iNvEsT iN A siNGlE ET wHERE AN iNDEpENDENT AssET mANAGER

DOEs THE ACTivE AllOCATiON OR yOu, sAys mANOOJ misTRy, uk

HEAD O Db X-TRACkERs, DEuTsCHE bANks ET DivisiON.

using ETF

he traditional premise or investing in

an ETF is to track the perormance o a

market at low cost via a tightly

regulated and liquid trading instrument. As

index trackers, ETFs are explicitly designed not

to provide returns above those provided by the

index. Rather, they are simply designed to be an

ecient mechanism or delivering

to the investor the indexs risk and reward.

In investment circles, acquiring exposure to the

whole market in this way is reerred to as takingbeta exposure. Many long-term, buy-and-hold

investors are happy to maintain beta exposure

at low cost through investing in ETFs. Other

investors, however, aim not just to track market

perormance but to generate returns beyond

that o the market. This type o above-market

perormance is known as alpha.

ETFs can also be used to pursue alpha. However,

unlike traditional pursuers o above market

returns, who engage in stock and bond picking,

alpha generation using ETFs is all about asset

allocation being in the right market at theright time, as opposed to being long the right

underlying security.

Focusing on asset allocation as the main driver

o investment perormance as opposed to

company stock or bond selection constitutes a

modern alternative to the traditional asset

management approach. There is compelling

evidence to suggest this could be a good way to

generate alpha. Some academic research

suggests that the majority o the variance in

investor returns is determined by the overall

choice o asset class invested in, rather than theindividual choice o stocks or bonds. This may

help explain why most active managers do not

outperorm markets consistently over time.

db X-trackers, Deutsche Banks ETF platorm, is

the second largest ETF provider in Europe by

assets under management. With over 200 ETFs

to choose rom, covering all major asset classes,

investors can use db X-trackers ETFs to put

together their own asset allocation portolios.

As a basic example, an investor seeking a

globally diversied and asset class diversied

portolio, but with an allocation biased towardsemerging markets, could combine long

positions in db X-trackers ETFs on the FTSE

T

dym et lloto

20 EXCHANGE TRADED | Deutsche Bank db X-trackers


21/28

All-World Ex UK, the iBoxx Gilts Total

Return Index, the DBLCI OY Balanced ETF

(GBP) which provides broad commodity

market exposure and the MSCI Emerging

Markets TRN Index ETF, with a heavy

weighting towards the latter. (Note that this is

a hypothetical example only. Investors should

seek proessional advice beore trading.)

For investors who do not wish to actively

manage their own portolios, but like the idea

o potential alpha generation through active

asset allocation with ETFs, there is another

alternative. In February, db X-trackers

launched an actively managed ETF that uses

asset manager SCM Private to allocate an

underlying portolio o exchange-traded

products. The db X-trackers SCM Multi Asset

ETF invests in a portolio o ETFs and

exchange-traded commodities (ETCs) with the

goal o using asset allocation to accumulate

returns signicantly ahead o infation. Key

attributes o the ETF are:

Mlt aet the und invests in a widerange o Deutsche Bank ETFs and ETCs to

gain signicant diversication and liquidity

at low cost.

atvely me the weightings/asset

allocations are actively managed on at least

a monthly basis by SCM Private and may be

all equity, all bonds or all cash.

ivetmet e the und will invest

solely in indices in order to produce more

diversication and less volatility.

scM me wt povet eo ove my ye chie

investment ocer Alan Miller has an

exceptional record as a successul und

manager with over 22 years experience in

many dierent investment vehicles ranging

rom pension unds, investment trusts, unit

trusts and hedge unds.

Low ot the db x-trackers SCM Multi-Asset

ETF has an all-in ee o 0.89% pa. This

compares avourably with an average total

expense ratio (TER) (annual operating costs

including underlying und costs) or aund-o-unds investing into externally

managed equity unds o around 2.47%*.

Tpet the ull portolio including

all underlying holdings is published daily

on the internet.

By being highly diversied through being

exposed to a range o ETFs and ETCs, which

themselves track the perormance o a large

number o constituent securities the db

X-trackers multi-asset ETF aims to deliver

stability in total returns while managing

volatility. The product combines the positive

elements o ETFs, such as being relatively

low cost and transparent, with active

management perormance. It is a straight

orward and modern alternative to traditional

discretionary unds.

prodct inoraton

iveto ol ote tt b x-te

ETF e ot ptl potete o tee

veto e b x-te ETF

ol be pepe ble to t

loe o te ptl vete p to totl

lo. The value o an investment in a db

X-trackers ETF may go down as well as up and

past perormance is not a reliable indicator o

uture perormance. Please consult your

nancial advisor beore you invest in a db

X-trackers ETF since not all db X-trackers ETFs

are suitable or all investors. A comprehensive

list o risk actors is provided on www.et.

db.com. For urther inormation regarding risk

actors o a specic instrument, please reer to

the risk actors section o the prospectus, or

the Key Investor Inormation Document.

Manooj Mistry, UK head

o db X-trackers: Manooj

Mistry is UK head o db

X-trackers, Deutsche Banks

exchange traded unds (ETF)

platorm. Manooj joined

Deutsche Bank in 2006

having previously worked at

Merrill Lynch International,

where he was responsible orthe development o LDRS

ETFs, the rst ETFs to be

launched in Europe. Manooj

graduated in economics

and business nance rom

Brunel University.

Manooj Mistryuk Head o d X-tracer

Deutsche Bank

21Deutsche Bank db X-trackers | EXCHANGE TRADED

b -te scM Mlt aet ETF

All-in Fee/TER 0.89%

Trading Currency GBP

Exchange Code XS7M

ISIN IE00B6TTP151

UCITS IV Complaint Yes

ISA/SIPP Eligible Yes

* Source: Lipper, Investment Lie & Pensions Moneyacts, July 2011.

This article has been issued and approved by

Deutsche Bank db X-trackers.


22/28

22 EXCHANGE TRADED | Invesco PowerShares

mANy iNvEsTORs HAvE ARGuAbly bEEN DisillusiONED by

THE AppARENTly DismAl pERORmANCE O sTOCk mARkETs

GlObAlly OvER THE pAsT DECADE, HOwEvER, sCRATCHiNG

THE suRACE sHOws THAT THERE wERE mANy sTOCks THAT

HAvE DONE AiRly wEll, AND iNDiCEs THAT HAvE AvOiDED

sHARp Alls AND iN ACT, HAvE ACTuAlly pOsTED GAiNs.

ThE POWEr OF F

he FTSE 100 Index is constructed byinitially ranking all UK listed securities

by their market capitalisation, arrived

at by multiplying the number o shares in issue

by the current market share price. The largest

100 stocks rom this ormula make up the FTSE

100 Index we see in the nancial pages o the

national newspapers.

Since the launch in the United States o the

S&P 500 Index as the rst market capitalisation

weighted index in 1957, the global investment

community has embraced market-cap

weighting as the methodology underlying themajority o modern market indices. Quite

literally, market-cap weighting is the popular

choice and has been broadly accepted as the

standard way to measure equity markets.

Market-cap weighted indexing means the market

dictates the selection o and the weighting that a

stock receives in an index. This is problematic

because market speculation can cause signicant

mispricing o stocks which, in turn, can result in

what we believe to be disproportionate

weightings in that index. A good example o this

phenomenon occurred during the 1999-2000

tech bubble, when we saw internet company

share prices surge as a result o the uture

perceived growth these companies were expected

to generate in this new tech-savvy era.

As the share price o some o these companies

took on an almost vertical trajectory, traditional

indices based on market-cap ound their

weightings in such stocks were becoming larger

and larger keeping in mind that these indices

are derived rom the market capitalisation o a

company, which is linked to the share price.I the share price increases and in turn its

market capitalisation, then its weight within

an index increases too.

Market-cap weighted indices do not usuallyprovide an accurate representation o the state o

an economy, but they do mirror the volatility o

stock prices. The market price o a stock can be

signicantly infated by the perceived uture

growth prospects o the underlying company

which, as we saw during this tech-bubble, can be

overly optimistic, incorporate unknowns and

thereore be prone to inaccuracies. As a result,

the underlying economic size and strength o a

company cannot be determined with any real

accuracy by reerence to its position in a market

cap-weighted index due to possible market

speculation and mispricing.

A arter a to acce the aret

Fundamentally weighted indices could be

viewed as being essentially a modernisation o

cap-weighted indices. These indices use a

undamentals-weighted approach designed to

assign index weights according to the nancial

considerations o a company, not its market

capitalisation. Fundamental indexation relies on

portolio weights that are derived rom

company undamentals (cash fow, book value,sales and dividends), rather than portolio

weights derived rom the market valuation o

shares in issue. We believe that these indices

provide the opportunity to more accurately

determine those assets with higher returns and

lower risk proles when compared to traditional

cap-weighted indices or benchmarks.

Some indices are constructed using only a

single measure. At Invesco PowerShares, we

believe in a balanced approach and look or

those indices which incorporate a range o

corporate undamentals and thereore provide amore balanced picture o the nancial quality

and economic opportunity o a particular

constituent company.

Issued and distributed in

the UK, on behal o Invesco

PowerShares, by Invesco

Asset Management Limited.

Registered Address: 30

Finsbury Square, LondonEC2A 1AG. Authorised and

regulated by the Financial

Services Authority.

Ravinder Azad has over 13

years experience in asset

management, o which almost

eight have been spent in

Listed Fund Sales. He has been

instrumental in the launch

and on-going promotion

o the Invesco PowerShares

UK Exchange Traded Fundsbusiness. Ravinder passed

the IMC in 2000 and is a

member o the CFA Society.

Ravinder Azadlted nd sae Execte

Invesco AssetManagement Limited

T


23/28

Invesco PowerShares | EXCHANGE TRADED

undaMEnTaLsndaenta eare canetter refect a coaneconoc contrton

In contrast to market-cap weighted indices,

which mirror the volatility o stock prices,

undamental indices assign weights according to

a companys operating and accounting

perormance, helping to ensure whats believed to

be a more accurate representation o its internal

economy in relation to its place in the index.

Fundamental indices do not allow the market

to directly dictate the weight a stock receives in

an index so they are less likely to refect stock

market bubbles. This is because a constituent

companys revenues and dividends are not

directly aected by share price speculation.

ndaenta eghted ndce

Aredesignedtoidentifythefairvalueof

each company.

Utilisefundamentalvariablesthatdonot

depend on the fuctuations o market valuation.

Performancemaybelessinuencedbystock

market bubbles as index member weights are

not driven by share price volatility

Ordinarilyavoidoverweightingovervalued

stocks a potential shortcoming with market

capitalisation-weighted indices.

more ecent ndexng o annecent aret

Cap-weightinghasarichhistory,buthasdenite shortcomings.

Fundamentalindexingseekstoaddressthese

short comings while maintaining the benets

o a broad market index.

It is thereore essential to understand the

construction methodology behind the index that

is being replicated by an Exchange Traded Fund.

iortant noraton

The price o ETFs and any income will fuctuate,this may partly be the result o exchange rate

fuctuations, and investors may not get back

the ull amount invested.

Past perormance is not a guide to

uture returns.

When making an investment in an ETF,

you are buying shares in a company that

is listed on a stock exchange. Investments

cannot be made directly into an index.

ETFs share prices are subject to a bid/oer

spread, subject to management ees, and

whilst they seek to track an index, there is

no guarantee that this will be achieved.

Accordingly, ETF investment returns will

be dierent to those o the index.

rette veto: the inormation in

this document is designed solely or use in

the UK, and complies with regulatory

requirements o this jurisdiction only, and

is not intended or residents o any other

countries. The distribution and the oering

o ETFs in certain jurisdictions may be

restricted by law. Persons into whose

possession this document may come are

required to inorm themselves about and to

comply with any relevant restrictions. This

does not constitute an oer or solicitation

by anyone in any jurisdiction in which such

an oer is not authorised or to any person

to who it is unlawul to make such an oer

or solicitation.

Persons interested in acquiring ETFs

should inorm themselves as to (i) the legal

requirements in the countries o their

nationality, residence, ordinary residence

or domicile: (ii) any oreign exchange

controls: and (iii) tax consequences which

might be relevant.

This document is intended or inormation

purposes in regard to the existence and

potential benets o investing in ETFs.

However, it is not intended to provide

specic investment advice including,

without limitation, investment, nancial,

legal, accounting or tax advice, or to make

any recommendations about the suitability

o the ETF or the circumstances o any

particular investor. You should take

appropriate advice as to any securities,

taxation or other legislation aecting youprior to investment.

23


24/28

THE ET REvOluTiON is NOw TRuly GlObAl iN AlmOsT

EvERy pART O THE DEvElOpED wORlD NEw ET pROviDERsARE spRiNGiNG up AND ETs ARE EvEN THREATENiNG TO

iNvADE THE DEvElOpiNG wORlD wiTH NEw lAuNCHEs iN

plACEs As vARiED As bOTswANA AND TAiwAN.

EXCHANGE TRADED | The ETF Boom!

Te ETF

BOOM!

auging just how successul this

indexing revolution has become is airlystraightorward, as many o the leading

issuers o ETFs such as iShares (now owned by

giant US asset management rm Blackrock) and

Deutsche Bank (through their DB X trackers unit)

closely monitor the market, attempting to spot

key trends and generally keeping a watchul eye

on liquidity on exchange.

At the end o June 2011 or instance analysts at

Deutsche estimated that the global index

tracking industry had reached assets under

management o $1.4 trillion globally, with 22%

(216.4 billion) concentrated in European listedunds. The Deutsche analysts also reckon

that looking at the most recent ten year

period, over the past decade, the European

ETF industry grew [measuring assets] by

thirteen old (13.2x), while the US ETFmarket grew over six-old (6.5x).

These numbers represent extraordinary

growth over the last decade ETFs were

virtually non-existent in Europe at the

beginning o this new century and even in

the US they were a tiny niche. Now ETFs

are arguably the astest growing part o the

whole global asset management business.

By the end o December 2011 the Deutsche

Bank analysts reckoned that there were over

3,210 exchange traded products (unds and

notes) o some sort globally o that total o

3,210 products, 2,823 were ETFs and 387

either ETCs or ETNs.

G

24

By David Stevenson, Investment Columnist, Financial Times


25/28

whch aet cae are oarth ET?

The table below rom Blackrock gives us some

idea o the key markets avoured by equity

investors. Unsurprisingly equities o all shapes

and sizes dominate the market although in

fows into xed income securities (bonds) as

well as commodity unds has increased

markedly over the last ew years.

Wt o ee te vet ?

now invest globally, in both conventional and

infation linked bonds, with issuers as diverse

as low risk governments through to very highrisk sub investment grade corporate.

Crucially the income yields on oer vary

hugely with low risk short dated government

bonds paying as low as 1% (or even lower)

through to high yield corporate bond unds

paying out not ar o 10%. Total expense

ratios are also very low on these bond trackers,

with no unds charging more than 0.50% and

more than a ew less than 0.20% pa.

But investors also need to think careully

about investing in bond ETFs especially withrisky issuers such as emerging markets

governments and big corporates. Bond indices

are deliberately weighted in their composition

towards the largest bond issuers not the most

reliable, credit worthy issuers. This means that

an index in junk corporate bonds or instance

is likely to have its heaviest weighting in the

most traded, most liquid bonds which are

likely to be issued by the most indebted

companies. Might it not be better to invest in

those issuers with the lowest risk levels and

highest credit ratings as opposed to the most

popular bonds?

commoty ETF

Small, specialist index tracking und specialists

such as ETF Securities have prospered hugely

in recent years, helped along by a massive

increase in unds allocated to commodity

unds generally and precious metals in

particular. To this day even though gold prices

have stalled, big gold unds run by the likes o

ETF Securities continue to experience massive

infows o as much as $1 billion every month.

Investors worried by central bank interventionin the money markets are betting that

eventually infation will rear its ugly head,

with largely uncontrollable results, sparking a

massive increase in gold prices. These ears

have pushed investors to pump money into

ETCs that invest in what is called physical

allocated gold. These trackers allow an

investor to buy an allocated share o actual

physical gold held in large, secure gold vaults

in London, New York and Switzerland. Charges

are usually airly low (well under 0.50% or the

main unds) and most investors are re-assuredby the act that they own gold assets directly

under the control o the und managers, not a

large investment bank.

25The ETF Boom! | EXCHANGE TRADED

Data as at end o November 2011 or where updated data is not

available, we utilise the most recent period available.

Source: BlackRock Investment Institute, Bloomberg

The bg Ne Trend n ET land

This analysis by BlackRock is enormously

revealing. It shows that ETFs have become

both popular and also diverse. Gone are the

days when investors simply used ETFs to access

a large and important stock market

index such as the FTSE 100 or the S&P 500.

This data suggests that in recent years investors

have primarily been using ETFs as the building

blocks or very diversied portolios ull o

innovative strategies and markets.

Bo ETF

Investing in bonds has become popular with

ETF investors in recent years. Bonds have

had a good decade compared to equities in

terms o returns, so a big infow o unds into

bond ETFs shouldnt be terrically surprising.

But that insatiable demand has sparked a

huge increase in the variety o bond ETFs

available to the private investor - you can

Epoe t nov 2011

us Bllo auM

Met

e %

YTd e ete m-

emet %

Equity 1,067 69 0.4

North America 556 36 4.6

EmergingMarkets 204 13 -14.3

Europe 114 7 -5.8

Asia Pacic 79 5 -3.8

Global exc US 66 4 3.2

Global equity 48 3 89

Fixed Income 251 16 21.1

Commodities 196 13 5.7

Alternative 4 0 -1.2

Currency 8 1 27.8

Mt t ot

be bette tovet toee wt

te lowet level

et ett

oppoe to temot popl

bo?


26/28

At the moment investor interest in more

mainstream commodity ETCs has diminished,

especially as Chinese growth slows down andindustrial metal prices wane, although its also

true that agricultural spot prices have shot up

recently ollowing the recent poor US grains

harvest. But investor interest in commodities is

bound to wax and wane over the course o the

business cycle and talk o a global economic

recovery will probably result in yet another surge

o interest in commodity tracking unds - these

ETCs invest in utures contracts or all manner

o individual commodities ranging rom a broad

group o energy markets (including oil) through

to individual trackers or copper or grains.

Eme Met ETF

Many investors have woken up to the potential

or solid, long term prots rom investing in

emerging and rontier markets. There are many,

excellent emerging markets managers already

operating in the investment trust sector or

instance including Hugh Young at Aberdeen,

Slim Feriani at Advance and Mark Mobius at

Templeton, but the choice o unds is much

bigger within the ETF universe and the costs are

much lower. Fund managers such as HSBC have

made a point o specialising in these emerging

markets, oering ETFs with lots and lots o

choice and very low ee structures (the vast

majority o HSBCs product range charges less

than 0.50% per annum) and also boast simple

to understand physical tracking structures.

Fmetl te

A number o undamental index tracking unds

have also emerged in recent years the key

insight here is that some investors dont believe

that the market always put a sensible price on

some unloved stocks. Some value investorswould rather invest in an index where the

constituents in that index are decided not by

the manic mood swings o the market but by

their undamental value, using measures such

as the dividend yield (higher yielding stocks are

a bigger percentage o the index) or a

combination o undamental actors including

the book value o the companies.

where are o n or e cce?

Perhaps the most important big new

innovation in the world o index tracking unds

is the simplest to understand the multi-asset

portolio. Most investors now run their

portolios in a relatively intelligent, diversied

way - they dont just buy a ew single company

UK stocks and be done with it, but look toinvest across dierent country markets as well

as varying asset classes including bonds, gold

and other commodities. This diversication

means that investors will typically want to run

diversied, multi asset portolios which will

evolve over time. Two key insights stand out

rom this observation the rst is that good

diversication across asset classes makes

absolute sense and in addition that as we grow

older, our tolerance o risk changes very

substantially, orcing us to change the

composition o our portolio.

Imagine you are 20 years old. You are earning

just enough money to put aside say 100 a

month in a und that you will stick with or the

next 40 years o your working lie, but or now

you want lots and lots o growth in your

underlying investments. That means you are

willing to take on some risk now and the

long-term data on returns suggest that the

riskiest, most rewarding o the major asset classes

are equities. Bonds, by contrast, are possibly a bit

boring and sae and although you are probably

never going to lose more than 20 per cent in any

one year (that is called your maximum

drawdown in the trade), equally you are never

going to bag any huge tenbaggers that make your

ortune. In summary, our 20 year-old thrusting

young buck quite sensibly decides that his risk

tolerance is high and that he wants to stack up

on equity exposure and go or it in terms o risk.

Flash orward 40 years. Our young buck is now a

considerably older 60 year old and he knows that

retirement is just ve years away, so he needs to

accumulate a large pot o savings capital to last

him through to his twilight years - he could be

living through until he is 90 years i current

longevity studies are proved right. This means

that capital preservation is all important to this

investor. He absolutely cannot aord a capital loss

or DRAWDOWN o something like 20 per cent in

one year that means he takes a very negative

view o equities and he is a big an o bonds.

Ho or netent tate changea o get oder

This transition in both tolerance o risk and

awareness o potential returns sits at the heart owhat is called liecycle analysis. Over those 40

years our private investor changes both

26 EXCHANGE TRADED | The ETF Boom!

iveto

woe byetl bteveto

te moeymet e

bett ttevetlly

fto wlle t ly

e.


27/28

physically and in his tolerance o risk and over

time that translates into a big change in their

choice o assets. Early on our investor is sensibly

interested in equities and probably no bonds,

whereas in their mid 40s they are probably

making the shit away rom equities into some

bonds and by the mid 50 our investor is

probably biased towards bonds. The simple

process o constructing a mix o assets that can

be used as the building blocks o a single

portolio and can change over time, has evolved

into something called the glidepath. The graphic

below shows how this transition starts with

high-risk assets, transitions through a balanced

approach in mid lie and ends with a mixture o

assets with a bias towards bonds later in lie.

Ho a gde ath tranatento a nd

This blindingly simple analysis has evolved

into something called a Risk Target und. As

weve already seen older investors are likely to

be more risk averse, so they are by denition

more conservative in their outlook. Step

orward multi-ETF portolios rom the likes o

Vanguard where the mixture o (passive) asset

classes is labelled Low Risk or Conservative.

By contrast, our younger investor might be

much more risk riendly, and be willing to

ride out the volatile equity markets by

investing in a High risk or Growth/

Adventurous portolio.

The key point is that in these target risk

unds, all the equity, bond or alternative

asset components or this diversied portolio

consist o dierent underlying ETFs or index

tracking unds. The asset classes are then

combined together to orm a diversied,

single portolio which can be bought as a

core investment. Crucially this single

portolio o ETFs or index tracking unds is

usually very low cost (most multi-asset

portolios charge under 0.80% per annum,

with some oering portolios or less than

0.40%) and can be changed as the investors

tolerance o risk changes over time i.e. as

they get older they can sell their adventurous

portolio and opt or a more cautious,

conservative Low risk portolio.

27The ETF Boom! | EXCHANGE TRADED

Tto

bot toleeo wee

o potetlet t

t te eto leyle

ly.

Asset Allocation (%) Source: David Stevenson

Years until retirement

100

80

60

40

20

0

40 35 30 25 20 15 10 5 0 -5 -10

The chart below shows a typical glidepath showing changing exposure over a number o years to bonds (lighter brown)

and equities (darker brown), with range o dierent possible allocations indicated by dotted line.

Opinions expressed are those o

David Stevenson, not Alliance

Trust Savings Limited. Please read

the important inormation at the

end o this publication.


28/28

Investments can go down as well as up and capital is at risk.The original amount invested may not be returned.

Past perormance is not a guide to uture perormance.

Not all exchange traded unds/ exchange tradedcommodities (ETF/ ETC) are suitable or all investors assome are high risk and only suitable or sophisticatedinvestors. Beore investing you should ully amiliariseyoursel with the risk actors associated with a und. Pleasereer to the risk actors section o the Prospectus or theKey Investor Inormation Document/ Listings i available.These can be ound on our website or the und managersown website.

I there are any terms you are unamiliar with or you are

unsure o, you may wish to seek nancial advice.Investment in ETF/ETCs may expose investors to any or allo the ollowing risks: risks relating to the relevantunderlying index, credit risks on the provider o indexswaps, exchange rate risks, interest rate risks, infationaryrisks, and liquidity risks.

Non-UCITS compliant unds: Some o the ETF/ETCsavailable through the ATS platorm are Non-UCITS RetailSchemes. These are UK unds that do not comply with allthe UCITS rules and, thereore, cannot be promoted acrossthe EU. They can, however, be sold to UK retail investors.Such unds can invest in a wider range o eligibleinvestments than UCITS. I you are unsure whether a undis UCITS or not please give us a call. I you are unsure o

the implications o this then you may wish to seeknancial advice.

Some o the unds have underlying holdings which aredenominated in currencies other than Sterling andthereore may be aected by movements in exchange rates.Consequently, the value o these investments may rise orall in line with exchange rates.

Inv