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NICSA Product Development Landscape Exchange
Traded Funds
Michael Latham
November 20, 2003
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Discussion Topics
Overview of the ETF market How
investors use ETFs and why Evolution of
new products
- Growth in the U.S. and European Markets

• Applications and Retail / Institutional mix
• ETF benefits

• Next phase of new products

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Overview of the U.S. and European ETF Market
The ETF market in Europe and the U.S. has grown
tremendously both in assets (150B) and product
offerings (232).
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Competitive pressures increasing

• Two largest mutual fund managers, Fidelity and
  Vanguard, have recently entered or redoubled
  their ETF efforts, in addition to four large
  Institutions, BGI, BoNY, ML, and SSgA, already
  advising US ETFs.
• Consolidation has begun in Europe, while
  established US ETFs will be difficult to displace.

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ETF market growth is largely attributable to its
product features

• ? Low Fees and Expenses
• - e.g.. Avg. U.S. Equity ETF 29bps vs. 152bps
  for Domestic Equity MF
• ? Diversification
• Exposure to an entire market, index, sector with
  one security
• ? Tax efficiency
• ? Transparency
• - Getting what you buy with no style-drift
• ? Accessibility
• Trade on major stock exchanges throughout the
  day

Source Morningstar, Expense Ratios as of
November 2, 2003
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ETF Applications

• Institutional
• Cash equitization / futures substitute
• Risk management
• E.g. Add/remove duration risk to portfolio by
  buying/shorting TLT
• Portfolio building blocks w/12d-1
• Portfolio hedging
• Manager transition

• Retail
• Asset Allocation building block
• Completion strategy
• E.g. No small cap SMA or in-house product, use
  IWM
• Index Core, Active Satellite
• New or small account implementation
• Strategic sector bets

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Institutional / Retail AUM split is 60/40
Assets have grown from 7 B to 47 B during this
time, with steady demand from each segment. E.g.
Broker, RIA, Bank, Pension, Mutual Hedge funds,
etc
Source BGI research
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The next wave of product development

• Equity Nearing saturation
• Dividend focused
• Country funds
• Value/Growth of Regional funds
• Fixed Income Marketplace testing and acceptance
  begun
• TIPS
• Lehman Aggregate
• Next Generation In the laboratory
• ETF of ETFs?
• Active?
• Inverse?
• Commodity?