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Berlin, November 16-18th, 2011
Everything you ever wanted to know about ETFsCitywire Berlin
November 2011Page 1
Thomas MerzHead ETF Switzerland/Liechtenstein
Enrico CameriniHead ETF Italy
October 2011Page 2
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
Agenda
Overview of the European ETF Industry
Points to Consider When Evaluating an ETF
The European ETF Industry: Current Regulatory Review
Credit Suisse ETFs
Appendix
October 2011Page 3
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
We have seen exponential growth across the ETF market
ETFs are a worldwide phenomenon with more than US$ 1.24 trillion invested across the globe and a Compounded Annual Growth Rate (CAGR) of 30% over the last 11 years
More than half of current assets are in US domiciled ETFs with Europe accounting for 20% of the market
•Source: CS ETF Sales Strategy, Blackrock
Sep 2011 Regional AUM Market Share
US 68%
Europe 21%
Asia 6%
Others 5%
74 105 142212
310412
566
796710
1,034
1,3071,241
0
200
400
600
800
1,000
1,200
1,400
Dec2000
Dec2001
Dec2002
Dec2003
Dec2004
Dec2005
Dec2006
Dec2007
Dec2008
Dec2009
Dec2010
Q32011
US$
bn
Debt and money marketCommodityEquity
CAGR Dec 2000 –
Q3 2011:30%
October 2011Page 4
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
The European ETF Industry
Assets and flows of European ETFs, as of
30.09.2011
At the end of September 2011 the European ETF market recorded assets of USD 261.70bn, down 16.29% from USD 312.61bn at the end of Q2
The MSCI World Index declined 17.06% over the same period; while the Eurostoxx 50 and S&P 500 indices posted declines of 23.48% and 14.33%, respectively
ETF market growth therefore remains positive, despite serious adverse headwinds
October 2011Page 5
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
2010 2011F 2012F 2013F 2014F 2015F
Projected Growth* of the ETF Market
Based on current projections, total global ETF AUM could grow from approximately USD1.5 trillion today to between USD3.1 trillion and USD4.7 trillion over the next five years.
1 Includes estimates for Americas, Europe, Asia (excluding Japan) and all other regions (eg
Japan, Mideast, etc.)2 Includes all exchange traded products (eg
ETF, ETFN, ETC) and baseline steady-state growth (no shocks to system)Source: McKinsey analysis; ETF Landscape Year-end 2010; industry reports*Financial market scenarios are not a guarantee for current or future performance
5-year CAGRPercent
26.7
16.7
High case
Low case
ETP AUM1,2
USD trillion
1.5 1.7 2.0 2.3 2.7 3.1
1.8
2.3
2.9
3.7
4.7
October 2011Page 6
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
Conversion from active to passive assets will drive growth
Source:
IGI for US data, as of 31.05.2011, and Asia total MF data, as of
Q4 2010; Lipper FERI FMI for Europe data, as of 31.03.2011, BlackRock
for Asia ETF AuM
data, as of 31.12.2011
Academics and investment advisors have increasingly been pushing for investors to shift from actively managed to passive funds. Current ratio of active:passive investments estimated by Towers Watson at 90:10, but optimally should be 30:70Increased allocations to passively managed funds is huge opportunity for ETFs
USD mm US Europe Asia Total
Total Mutual Fund AUM 12,402,900 8,400,670 3,067,323 23,870,893
Total ETF AUM 1,087,351 313,476 87,300 1,488,127
ETF as % of Mutual Fund AUM
Current
Potential
9%10%
4%10%
3%10%
6%
10%
Implied AUM Growth of ETFs
given potential
share of Mutual Fund AUM152,939 526,591 219,432 898,962
Implied total ETF AUM given potential share
of Mutual Fund AUM1,240,290 840,067 306,732 2,387,089
October 2011Page 7
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
NNA flows
for
European ETFs
per asset class
Source:
Bloomberg, Credit Suisse, data
as at end of September 2011
October 2011Page 8
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
Agenda
Overview of the European ETF Industry
Points to Consider When Evaluating an ETF
–
Choosing the right ETF
–
Case study: Gold ETFs
The European ETF Industry: Current Regulatory Review
Credit Suisse ETFs
Appendix
October 2011Page 9
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
ETF performance can be compared on the basis of net asset values (NAVs)
Tracking error (TE) alone often fails to provide enough relevant information for comparing ETFs (for example where swap-based products are concerned)
In addition to the total expense ratio (TER), the relative performance of the ETF compared to the reference index (total return net) is also an key factor to consider
Choosing the Right ETF
October 2011Page 10
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
The ETF creation and redemption process guarantees liquidity
Source: Credit Suisse
AuM
increase
AuM
decrease
Primary Market
ETF
AuM
increase
AuM
decrease
Underlying securities
Underlying securities
ETF Units
ETF Units
Creation
Redemption
Investor
Sell order:ETF Units
ETF Units
ETF market
Underlying Stock / Cash market
Futures
Options
Market maker /
authorised participant
Buy order:Cash or basket of stocks
Cash or basket of stocks
Investor
Primary
MarketSecondary
Market (Stock Exchange, OTC)
Trading mechanism of a long ETF position: Primary and Secondary market
October 2011Page 11
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
The liquidity of the underlying defines the liquidity of the ETF
Spread of approx 34bps (ask-bid/bid) with no trading volume on exchange. Despite this a size of 2007 units is being quoted (approx CHF 250'000)
Reason: The underlying assets (in this case US treasuries) are liquid. It is therefore relatively easy for the market makerto hedge his position
The liquidity of an ETF is based on the liquidity of its underlying assets
Conclusion: Liquidity doesn't depend on trading volumes but on the hedging costs of the underlying market risk, and the number of market makers quoting a binding price for the ETF
October 2011Page 12
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
Indexing Strategies
All securities within an index are purchased according to their weightings
Ensures a minimal tracking error (deviations) of the portfolio
The full replication method may result in many positions depending on the index and requires a portfolio construction tool
It is used mostly for liquid and/or narrow defined indices and for fixed income indexes without tax implications
A limited number of securities are considered. The number of securities determines the tracking error which can be forecasted. A minimum risk optimization is conducted by the use of a risk optimization tool
Ensures a controlled and low expected tracking error (deviations) of the portfolio eliminating economically unattractive investments
It is used mostly for indices with illiquid investments and/or broad based equity and fixed income indices. It is also used for fixed income indices with tax implications
Full Replication Optimized Sampling
Synthetic replication involves the use of derivatives (e.g. Equity-Linked Swaps “ELS”)
The manager receives benchmark performance in exchange of the substitute basket return from the counterparty (i.e. the ELS issuer)
Through the ELS, the fund is subject to counterparty risk. Should the counterparty default, the investment objective may not be achieved
Synthetic Replication
ETF Indexing Methodologies
October 2011Page 13
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
The traditional replication methodology with physical index constituents requires sophisticated portfolio management and optimisation
tools for trading and risk management.
–
Handling of index changes
–
Handling of corporate actions ( e.g. stock splits)
–
Handling of coupon and dividend reinvestments
–
Withholding tax reclaims (double tax treaties)
–
Management of inventory (Securities Lending, etc.)
–
Optimisation
of transaction costs through order pooling
ETF Selection: Physical Replication
Source: Credit Suisse, October
2011
Index Performance
Investor
ETF
USD 100ETF Shares
Basket ofEquities
October 2011Page 14
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
Indexing methodology –
swap replication
A popular choice in Europe under UCITS, the fund invests in (i) a basket of securities which might be unrelated to the replicated benchmark and (ii) enters into a performance swap with a counterparty
Under the swap, the fund receives the benchmark performance in exchange for the substitute basket performance
The tracking error is “outsourced” from the investor to the swap counterparty, but counterparty risk arises (max 10% of ETF NAV, per counterparty)
An efficient replication methodology, that (i) allows low tracking error for fragmented, highly costly or difficult to access markets and (ii) also allows exposure to a broader investment universe
ETF Selection: Synthetic Replication
Source: Credit Suisse, October
2011
Basket ofEquities
USD 100ETF Shares
Investment Bank
Pays index performance
Pays equity basket performance
Total Return Swap
Investor
ETF
October 2011Page 15
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
Synthetic ETF Considerations
Funded or unfunded swap?
Single or multiple swap counterparty?
Financial strength/ viability of swap counterparty
Quality of swap collateral
Transparency of the swap structure (does the investor know what they own?)
Swap “reset” frequency (daily, weekly, 10% exposure limit?)
Is there a securities lending program in place for the substitute basket/ swap collateral?
What is the swap spread charged to the investor?
October 2011Page 16
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
Versatile: ETFs are popular among private and institutional investors both as long-term investments or to implement active trading strategies, for market making and to over- or underweight particular asset classes
Targeted use of assets: The Credit Suisse ETF portfolio covers the major equity and bond indices of the world's leading stock exchanges and economies. Thematic and regional funds such as those on emerging markets, global alternative energy and physical gold complement the range
Short term portfolio adjustments: ETFs can be traded throughout the entire trading day and are ideal for short term portfolio adjustments
Advantages
of ETFs
October 2011Page 17
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
In line with the benchmark index
Risks
Involved
in Investing
in ETFs
Tracking
risk
Regulatory
risk
Currency
risk
Market risk
Counterparty
risk
In funds where the fund currency differs from the trading currency
As a result of TER and the replication method used, an ETF's NAV may differ slightly from the performance of the reference index
Swap-based ETFs carry a counterparty risk as a result of the swap transactions they are based on (the swap is used to replicate the index); securities lending in cash-based ETFs may also result in a counterparty risk
ETFs are only actively promoted in countries where they are registered for sale
October 2011Page 18
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
Securities Lending and CS ETFs
Securities lending constitutes a counterparty risk. The implementation differs greatly among ETF providers
Credit Suisse has a long track-record in securities lending, has the ability to generate excellent lending opportunities and is among the preferred counterparties in the market. This often results in advantageous prices and enables the portfolio manager to optimize portfolio returns
CS ETFs Irish domiciled fund range currently does not engage in securities lending. For CS ETFs Swiss and Luxembourg domiciled funds, Credit Suisse applies the following four step process:
1.
Principle lending with Credit Suisse
2.
Only
collateralized
securities
lending
3.
Overcollateralization
(105-115%)
4.
Daily valuation and monitoring of the collateralization
October 2011Page 19
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
Benefits and Risks of Different Exchange Traded Instruments
October 2011Page 20
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
Benefits and Risks of Different Exchange Traded Instruments (contd)
October 2011Page 21
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
Agenda
Overview of the European ETF Industry
Points to Consider When Evaluating an ETF
–
How to choose the right ETF
–
Case study: Gold ETFs
The European ETF Industry: Current Regulatory Review
Credit Suisse ETFs
Appendix
October 2011Page 22
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
ETFs
on Gold in Switzerland –
a Comparison
CS ETF II (CH) on Gold* ZKB Gold ETF JB Physical Gold FundStructure Swiss domiciled investment fund Swiss domiciled investment fund Swiss domiciled investment fund
Physical gold Yes, Credit Suisse (Zurich) Yes, ZKB / SIS Sega Intersettle Yes, Julius Baer / SIS Sega Intersettle
Currency hedge Yes, CHF & EUR tranche Yes, CHF, EUR & GBP tranche Yes, CHF, EUR & GBP Tranche
AuM Approx CHF 3 bn Approx CHF 10 bn Approx CHF 6 bn
Exchange for physical Yes, all bars (min CHF 200’000) Yes, only standard bars (12.5 kg) Yes, only standard bars (12.5 kg)
Indicative spread (stock exchange)
10 -
20 bps (hist. avg.) 10 -
20 bps (hist. avg.) 10 -
20 bps (hist. avg.)
TER p.a.33 bps (USD)
41 bps (hedged EUR/CHF)
40 bps (USD)
45 bps (hedged EUR/CHF)
42 bps (USD)
43 bps (hedged EUR/CHF)
Reference price London PM Fixing New York Fixing London PM Fixing
Advantages of CS ETF on Gold
Swiss domiciled investment fund (no issuer risk) and 100% backed with physical gold
Competitive TER (0.33% p.a.)
The CS ETF on Gold is based on the „London PM Fixing“ gold price: the most liquid and well-known marketfor gold
Exchange for physical from CHF 200‘000
* This fund is not registered for public distribution in Germany
October 2011Page 23
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
Advantages of investing in Gold using ETFs
compared to Swaps and Direct Investments into Physical Gold
High level of security: the CS ETF on Gold is a Swiss domiciled investment fund. No issuer risk orcounterparty risk exists (investing in swaps or buying physical gold on a metal account would result in a counterparty risk)
The intraday liquidity of an ETF allows for timely access or exit of the market (particularly important in periods of high volatility)
Tight ETF spreads on exchange and OTC enable cost efficient implementation of tactical holdings
Easy to manage and generally cheaper than a direct investment in physical gold (investments into physicalgold need to be physically handled, incuring costs)
ETFs enable short positions to be taken
CS ETF on Gold can be traded either intraday or at closing NAV. The indicative spreads are:
–
On exchange
(intraday): 10-15 bps
(for
volumes
up to approx
CHF 1‘000‘000)
–
OTC (intraday
and closing
NAV order): 4-6 bps
October 2011Page 24
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
Gold and Asset Allocation Gold is by no means a risk free investment. Gold has similar volatility to equities. Silver, platinum and palladium have even higher volatilities.
However at the same time, gold has a different price cycle than traditional assets such as stocks or bonds. For instance, gold prices tend to do well during periods of falling real interest rates. They provide a certain hedge against USD weakness and inflation. Moreover, they tend to perform well during extreme events.
As a result, gold and other precious metals are good diversifiers for traditional portfolios. Adding gold to otherwise diversified stock and bond portfolios can reduce volatility significantly. Precious metals and gold in particular can also help to reduce risk (and particularly tail risk) in FX portfolios.
For academic research on precious metals and asset allocation please refer to:
–
Erb
& Harvey (2005), The Tactical and Strategic Value of Commodity Futures, NBER Working Paper Series Vol. w11222
–
Gorton & Rouwenhorst
(2005), Facts and Fantasies about Commodity Futures, Financial Analysts Journal Vol. 62 No. 2
–
Michaud, Michaud & Pulvermacher
(2006), Gold as a Strategic Asset, World Gold Council
–
Mongars
& Marchal-Dombrat
(2006), Commodities: An Asset Class
in their
own
Right?, Banque de France Financial Stability
Review
No. 9
October 2011Page 25
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
The Importance of the Currency HedgeHistorically and over the long term, gold had the opposite performance compared to the foreign exchange USD/CHF and USD/EUR. An active strategy on the currency hedge side is important for non-USD clients
Historical performance indications and financial market scenarios are no guarantee for current or future performance.
Source: Bloomberg, periode
31.12.2002-30.09.2011
Return over
the
period:
Gold in USD: +364%
Gold converted
in CHF +203%
Gold hedged
in CHF +312%
USD/CHF -35%
80100120140160180200220240260280300320340360380400420440460480500520
12/0
2
04/0
3
08/0
3
12/0
3
04/0
4
08/0
4
12/0
4
04/0
5
08/0
5
12/0
5
04/0
6
08/0
6
12/0
6
04/0
7
08/0
7
12/0
7
04/0
8
08/0
8
12/0
8
04/0
9
08/0
9
12/0
9
04/1
0
08/1
0
12/1
0
04/1
1
08/1
1
12/1
1
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5Gold Spot in USD (indexed)
Gold Spot converted into CHF (indexed)
Gold Spot hedged CHF (indexed)
USD/CHF (right hand scale)
October 2011Page 26
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
Costs of Currency Hedge –
the Interest Rate Differential
Source: Bloomberg, Credit Suisse. Data
as of 30.09.2011
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
12/0
2
06/0
3
12/0
3
06/0
4
12/0
4
06/0
5
12/0
5
06/0
6
12/0
6
06/0
7
12/0
7
06/0
8
12/0
8
06/0
9
12/0
9
06/1
0
12/1
0
06/1
1
12/1
1
Interest Rate Difference USD-CHF (1-month Libor)
Hedging costs are currently very low (approx 0.2% p.a.)!
October 2011Page 27
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
Agenda
Overview of the European ETF Industry
Points to Consider When Evaluating an ETF
The European ETF Industry: Current Regulatory Review
Credit Suisse ETFs
Appendix
October 2011Page 28
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
Regulatory Spotlight on ETFs
-
an Overview
April Mai June July August September October
12.04 FSB
13.04 IMF
13.04 BIS
Conflicts of interestSecurities lendingTransparency requirementsUse of derivativesCollateralizationRegistration requirementsLiquidityRegulatory arbitrageMismatched incentivesSystemic risk
Bank of
England
FSA
UK Serious
Fraud Office
22.07 ESMA
07.09 IOSCO
21.09 ESRB
21.09 FINMA
ComplexityOpacityInterdependenceMarketing of ETFs
Potential dangers emanating from ETFsETF structuresTransparencyLiquidity
Product classificationTransparencyConflicts of interestFinancial stabilityIndependence/ GovernanceSystemic risks emanatingfrom ETFs and UCITSLiquidity risks of swap providersCounterparty risk and securities lendingLiquidity risks in trading ETFsRisk transparency
October 2011Page 29
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
Agenda
Overview of the European ETF Industry
Points to Consider When Evaluating an ETF
The European ETF Industry: Current Regulatory Review
Credit Suisse ETFs
Appendix
October 2011Page 30
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
Credit Suisse ETFs: A Leading European ETF Provider4th largest ETF provider in Europe with $17bn of AUM*The largest ETF provider in Switzerland*
One of the most experienced ETF providers in the European market: ETFs since 2001, indexing solutions since 1994
A leading ETF Provider
The second largest provider of physically replicated ETFs in Europe*
Sound foundations in the Credit Suisse Asset Management (CSAM) expertise in indexing: 17 years track record of performance
Holistic investment approach: a team of 50+ professionals, to deliver excellence to our clients via ETFs, index funds and dedicated mandates
Asset Management expertise
Products listed on 5 stock exchanges across Europe: SIX Swiss Exchange, Borsa Italiana, Xetra, London Stock Exchange and NYSE Euronext Paris
Client coverage across the globe: Switzerland, UK, Ireland, Italy, Germany and Austria, France, Spain, Nordics, Benelux, HK
Global Reach
“Building block” approach with 58 ETFs to replicate all the main markets by geography and market cap
42 Equity, 13 Fixed Income and 3 Physically-backed Commodity ETFs
UCITS Irish & Luxembourg based funds and non-UCITS Swiss-domiciled funds
Comprehensive Product Range
CS ETFs is 100% owned by CSAM
Operates solely within CSAM’s fiduciary framework, minimising conflicts of interest to the greatest degree possible
A Regulated Fiduciary
* Source: CS ETFs
Sales Strategy, Bloomberg, 27.10.2011
October 2011Page 31
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
Credit Suisse ETFs: A Focus on Physical Replication
–
In today’s turbulent markets clients are demanding less complex, more transparent products to achieve their investment objectives
–
Physically replicating ETFs
embrace the traditional, core benefits of this investment vehicle that have proved so popular with investors for nearly 20 years: simplicity, transparency, liquidity and low cost.
–
Efficient access to various asset classes in a safe and informed
manner: physical ETFs
offer benchmark exposure through a transparent, direct replication structure
–
Credit Suisse ETFs
product range comprises 46 physical and 12 synthetic funds: we
are committed to producing the industry’s best physical ETFs, offering synthetic ETFs
only when physical ETFs
are not possible, or demonstrably less efficient than synthetic in terms of TER, trading costs or liquidity.
–
Where we offer synthetic ETFs, we provide the highest levels of quality and transparency including daily swap reset to minimise counterparty risk and visibility of
all holdings on the website each day.
A return to the fundamentals of ETF investment:
A commitment to quality, trust and transparency:
October 2011Page 32
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
Our Product Suite58 ETF products enabling our clients to use a “building block” approach to gain exposure to the primary markets by asset class, geography and market capital structure
Developed Equities:
-
Credit Suisse ETFs
cover over 90% of global equity market capitalization-
Unique provider of a consistent range of MSCI Large/Small Cap by region-
Some of the largest ETFs
in Europe, such as the SMI with AUM of CHF3.2bn-
Among the most competitive providers, in terms of total efficiency on a risk-adjusted basis
Source: Credit Suisse
Fixed income (13) Commodities (3)
Regional Single country
Canada Italy Japan UKEurozone
(EMU)Switzerland* US
MSCI SMM
MSCI FTSE MSCI MSCIMSCIDowJones
MSCI
MSCI MSCIMSCI MSCI
MSCI Nikkei MSCIMSCI SLI SMI MSCI NasdaqDowJones
S&P 500
Emerging Equity (13)Developed Equity (29)
Mid cap
All cap
Small cap
Large cap
Pac ex.Japan
Europe
MSCI FTSE
Australia
MSCI
World
MSCI
* These funds are not registered for public distribution in Germany
October 2011Page 33
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
Our Product SuiteEmerging Equities:
-
12 Dublin domiciled ETFs
/ 1 Luxembourg domiciled ETF-
4 Regional funds / 9 single country including the first European listed Chinese A Shares enabling investors to take part in thegrowing consumer market in China.
Source: Credit Suisse
Fixed income (13) Commodities (3)Emerging Equity (13)
Regional Single country
Emerging Market
EMLatAM
EM Asia
EMEMEA
Russia
Mid cap
All cap MSCI MSCI MSCI MSCI MSCI
Small cap
Large cap
Developed Equity (29)
South Africa
MSCI
Brazil
MSCI
Chile
MSCI
MexicoCapped
MSCI
China A Share
CSI 300
India
MSCI
Korea
MSCI
Taiwan
MSCI
October 2011Page 34
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
Fixed income:
-
Unique provider of consistent range of EUR and USD government bond indices
-
Sole provider of Swiss government bond exposure
Commodities:
-
Fund’s holdings of physical gold are safe-kept in Credit Suisse’s own vaults in Zurich
-
Unique provider of EUR-
and CHF-hedged gold exposures
Our Product Suite
Source: Credit Suisse
Fixed income (13) Commodities (3)Equity (42)
Physical
Single sector
Gold (USD / Hedged EUR / Hedged CHF)
Fixed income (13) Commodities (3)Equity (42)
Switzerland*
Europe
USA
Govt 1–3 years Govt 3–7 years Govt 7–10 years* ILB
iBoxx iBoxx iBoxx iBoxx
iBoxx iBoxx iBoxx iBoxx
SBI SBI SBI
Money Markets
Fed Funds Effective Rate
EONIA
* Switzerland
7-15 Years
* These funds are not registered for public distribution in Germany
October 2011Page 35
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
Total Cost Considerations and Capital Markets Support
Explicit –
Headline costs to investors
Implicit –
Other significant factors to consider
Total Cost of Holding an ETF
Explicit Costs Implicit Costs
Total Expense Ratio (TER) Tracking Error
Trading Costs: commission, spread
Dedicated capital markets team to help clients in reducing trading cost
Rebalancing Costs
Securities Lending: within ETF, of the ETF
Securities Lending is a revenue item (negative cost) but may add further risk
(Swap Spread)
Source: Credit Suisse, October
2011
October 2011Page 36
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
CS ETF Platforms
Switzerland (since March 2001)
Contractual structureFund management => Credit Suisse Funds AG
Luxembourg (since October 2002)
Contractual structure (FCP)Management company => Credit Suisse Fund Management S.A.
Ireland (since July 2009)
Corporate structure (SICAV / VCC)Management company and investment managerOutsourcing model
October 2011Page 37
Please see “Important Information” at the end of this material for important disclosures regarding the data and information contained and the views and opinions expressed in this material.
1
Structure
and
Contracts
Promoter
Credit Suisse AG
Investment Manager
Credit Suisse AG
Distributors
Credit Suisse AG
Company Secretary
Carne
Group
Legal Advisor
Maples
& Calder
I n v e s t o r s
Irish
ManCo
Credit Suisse Fund
Management Company
(Ireland) Ltd.
Administrator
BNY Mellon Fund Services
(Ireland) Limited
Custodian
BNY Mellon Trust
Company (Ireland)Limited
The
Company
CS ETF (IE) PLCCredit Suisse
Securities
(Europe) Ltd.
6
2
3
5
7
4
2
Custodian
Agreement1
2
3
4
Administration Agreement
Management Agreement
Investment Management Agreement
5
6
7
ISDA
Securities
Lending
Agreement
Master Securities
Lending
Agreement
October 2011Page 38
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What Determines the Spread of an ETF?
Overall two way flow in the product
-
Overall buyers and sellers involved in the ETF at any given point
Liquidity/ Cost of hedge
-
Market makers have to hedge the exposure when clients buy/sell ETF from/to them
Creation/ redemption charges and costs
-
There can be custody charges imposed by custodians of assets on
behalf of issuers
-
Taxes and stamp duty costs imposed by regulators (e.g. 50bp stamp duty in UK)
October 2011Page 39
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Total cost of ownership: The comprehensive method of assessment–
How one overcomes liquidity constraints is one of the most critical issues raised by our investor base
–
Coupled with this is the question of “How to achieve best execution when trading ETFs”?
Key considerations:–
Many of the liquidity issues raised are a perception of what is possible, not the reality
–
Although ETFs trade like stocks, they are not stocks and they have their own dynamics–
Underlying liquidity of the fund is the true determinant of the ETF’s
liquidity
Key to this is an understanding of :–
The creation and redemption process
–
Looking at the underlying liquidity of the fund
ETF “Best Execution”–
Is conceptually simple, albeit different for every fund
–
Is possible in practice as long as one follows certain rules–
Credit Suisse ETFs
has a dedicated Capital Markets Team to help navigate this
Best Execution
October 2011Page 40
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Agenda
Overview of the European ETF Industry
Points to Consider When Evaluating an ETF
The European ETF Industry: Current Regulatory Review
Credit Suisse ETFs
Appendix
October 2011Page 41
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Appendix: The Benefits of ETFs
Market AccessPrecise access to a wide range of asset classes including difficult to enter marketsDiversified exposure to a whole index - rather than a specific stock - in one tradeIdeal building blocks for implementing asset allocation strategies
Transparency Total transparency on fund holdings
Low FeesLow total expense ration (TER)
Cost effective alternative to traditional mutual funds
Highly RegulatedFully funded, open ended structures
Eligible for inclusion in ISAs and SIPPs
Liquid
ETFs experience price changes throughout the day as they are bought and sold continuously, with bid/ ask spread determined by the spread of the underlying index
Liquidity is provided by market makers throughout exchange opening hours
Operationally EasyNot a derivative – no ISDA (International Swaps and Derivatives Association) documentation,no margin requirements; single stock transaction
October 2011Page 42
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The use of full replication or optimised sampling method depends on the type of benchmark, the size of the portfolio, tax issues and specific restrictions.
Depending on the specific situation, Credit Suisse will apply the appropriate replication method that keeps the tracking error and the costs to a minimum, focusing on the needs of our investors.
Credit Suisse ETFs: Implementation (Physically-Backed)
Initial parameters
Benchmark characteristics: number of securities, regions, etc.
Consideration of factors which could impact cost and tracking error such as the liquidity of benchmark securities, tax implications, and other restrictions
Possible reduction of benchmark universe and / or enlargement by non benchmark securities
Derivation of replication method
Benchmark Portfolio size Other constraints
Full replication method Optimised sampling method
Purchase of complete set of securities
Optimisation
Cash based ETF, fully replicated Cash based ETF, optimised sampled
Define replication method
Build investment universe
Analyse liquidity, tax, restrictions on benchmark universe
Analyse benchmark universe
Tracking error Costs
Source: Credit Suisse
October 2011Page 43
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The Optimal Way for Investors to Trade CS ETFs
CS ETFsSales
Clients
Cap Mkts
Group work with Salesand Client to conduct pre-tradeanalysis and where necessary
recommend APs Liquidity Providers
Primary Market
BID OFFER
Order Book
Authorised Participants
Specialist
ETF BrokerProvide
two way quotes OTC
or
Cap Mkts
Exchange
OTC
Inventory/Borrow
or
ETFs can be traded on the secondary market by any broker recognised by the particular Exchange
Primary market (creation/ redemption) trading with CS ETFs available only to Authorised Participants (APs). Authorised Participants tend to be market makers (making market on exchange and/ or over the counter) but market makers don’t needto be Authorised Participants!
The Credit Suisse ETFs Capital Markets Team works with clients to provide optimal management of trading
Credit Suisse ETFs can help match flows, minimise market impact, provide information on optimal execution and sources of liquidity
Our sole focus is costs of trading and working with Credit Suisse ETFs clients
Source: Credit Suisse, October
2011
October 2011Page 44
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Trading ETFs: Don’t Impose a Single Stock Mindset on ETFs
ETF execution is often done by traders who come from a single stock background. This means that they apply the same concepts to ETFs when they are trading.
Good single stock liquidity indicators are:
–
Average Daily Volume (ADV)
–
Orderbook size
–
Number of orders in the orderbook
These concepts are relevant to ETFs but not in the same way
October 2011Page 45
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On-Exchange spread of 3bps
Some ETFs
May Have Tighter Spreads than the Underlying
Source: Bloomberg
October 2011Page 46
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Basket Spread of 15bps
Underlying market spread
CS ETF (CH) on SMI* Underlying Liquidity
Source: Credit Suisse, October
2011* This fund is not registered for public distribution in Germany
October 2011Page 47
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Does the Average Daily Volume dictates the size you can trade? In this example we have an ADV of 31,950 shares
Source: Bloomberg
October 2011Page 48
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This is not the case: 174,135 shares traded on this day, nearly 6 times the average shown
Source: Bloomberg
October 2011Page 49
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This is not the case: 1,206,480 shares printed as an OTC trade on this day, nearly 40 times the ADV shown
Source: Bloomberg
October 2011Page 50
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Credit Suisse ETFs Contacts
Head ETF Switzerland/Liechtenstein
Thomas Merz +41 44 334 18 07
Head ETF Italy
Enrico
Camerini
+39 335 1726 557
Bloomberg: CXTF <GO>
October 2011Page 51
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Important Information
This document was produced by Credit Suisse AG and/or its affiliates (hereafter "CS") with the greatest of care and to the best of its knowledge and belief. However, CS provides no guarantee with regard to its content and completeness and does not accept any liability for losses which might arise from making use of this information. The opinions expressed in this document are those of CS at the time of writing and are subject to change at any time without notice. If nothing is indicated to the contrary, all figures are unaudited. This document is provided for information purposes only and is for the exclusive use of the recipient. It does not constitute an offer or a recommendation to buy or sell financial instruments or banking services and does not release the recipient from exercising his/her own judgment. The recipient is in particular recommended to check that the information provided is in line with his/her own circumstances with regard to any legal, regulatory, tax or other consequences, if necessary with the help of a professional advisor. This document may not be reproduced either in part or in full without
the written permission of CS. It is expressly not intended for persons who, due to their nationality or place of residence, are not permitted access to such information under local law. Neither this document nor any copy thereof may be sent, taken into or distributed in the United States or to any U. S. person (within the meaning of Regulation S under the US Securities Act of 1933, as amended). Every investment involves risk, especially with regard
to fluctuations in value and return. Investments in foreign currencies involve the additional risk that the foreign currency might lose value against the investor's reference currency. Historical performance indications and financial market scenarios are no guarantee for current or future performance. Performance indications do not consider commissions levied at subscription and/or redemption. Furthermore, no guarantee can be given that the performance of the reference index will be reached or outperformed. In connection with this investment product, the Issuer and/or its affiliates may pay to third parties, or receive from third parties as part of their compensation or otherwise, one-time or recurring remunerations (e.g. placement or holding fees). In receiving payments by third parties the Issuer's and/or its
affiliates' interests may be adverse to those of the holders of this investment product and such payments can affect the investors return. You may request
further information from your bank/relationship manager. Potential conflicts of interest can not be excluded. This document qualifies as marketing material that has been published for advertising purposes. It must not be read as independent research.
THE INDEX PROVIDER MAKES NO WARRANTY AND BEARS NO LIABILITY WITH
RESPECT TO THE FUNDS OR ANY INDEX ON WHICH SUCH FUNDS ARE BASED, AND MAKES NO REPRESENTATION REGARDING THE ADVISABILITY OF TRADING IN SUCH FUNDS.
For prospective investors in Germany:
Each purchaser of shares acknowledges that CS ETF II (CH) on Gold, CS ETF II (CH) on Gold -
hedged CHF, CS ETF II (CH) on Gold -
hedged EUR, CS ETF (CH) on SBI Domestic Government 1-3, CS ETF (CH) on SBI Domestic Government 3-7, CS ETF (CH) on SBI Domestic Government 7-15 and CS ETF (CH) on SMI®
are not and will not be registered for public distribution in Germany. This document does not constitute a sales prospectus pursuant to the German Investment Act (Investmentgesetz) or the German Securities Prospectus Act (Wertpapierprospektgesetz). Accordingly, no offer of the shares may be made to the public in Germany. This document and any other document relating to the shares, as well as information or statements contained therein, may not be supplied to the public in Germany or used in connection with any offer for subscription of the interests to the public in Germany or any other means of public marketing. An offer of the shares exclusively to credit institutions and financial services
providers as defined in the German Banking Act, private or public insurance companies, investment companies and their investment managers as well as pension
funds and their administrators is not deemed to be a public distribution.
Copyright ©
2011 Credit Suisse Group and/or its affiliates. All rights reserved.