HALF YEAR 2017 REVIEW & MONTH ENDING JUNE 2017

BETASHARES

Ilan IsraelstamHead of Strategy and Marketing, BetaShares www.betashares.com.au

AUSTRALIAN ETF REVIEW

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AUSTRALIAN EXCHANGE TRADED FUND INDUSTRY: HALF YEAR REVIEW 2017 INDUSTRY “IN THE BLACK” FOR THE FINANCIAL YEAR

• It has been a very strong half for the Australian ETF industry for the first six months of 2017 • The industry’s funds under management grew rapidly, increasing 14% for the half to end the financial

year at a new record high of $29.4B • The industry grew FuM by $3.6B for the half, setting the scene for a record year of asset growth if such

growth is maintained in the second half.

• The majority of the year’s growth (77%) came from net inflows (i.e. rather than asset appreciation) with $2.8B flowing into the industry over the course of the half-year.

• Trading activity levels also reached record highs, with trading value increasing 10% compared to the previous half.

• Flows by issuer are concentrated so far this year, with the majority of the industry’s net inflows captured by the top 3 ranking issuers by net inflows, with BetaShares (#1), Vanguard (#2) and State Street (#3) attracting ~70% of the industry’s net flows.

• Product development activity has actually been relatively slow so far this year, when compared to recent periods – with a total of 14 new products launched (compared to 40 new products launched over the course of 2016). We believe the pace of new products is likely to slow somewhat as the industry matures, but we expect the pace of new launches to remain robust.

• By inflows, passive index products took in the largest amount of new money (~74%) but interestingly a full 20% of inflows came from ‘smart beta’1 products – a space we are watching carefully and is increasingly being adopted by investors, particularly via financial advisers.

• Active ETFs were more subdued in terms of inflows compared to previous periods (receiving 6% of the flows YTD), however we expect this level to increase as new products are released to the market.

• Exchange Traded Funds capturing the largest amounts of new money over the course of 2017 to date were revealing in terms of the prevailing investment themes for the year:

In somewhat of a departure from previous years, Australian Equities products took in the largest amount of flows (~$1B) with international equities following at ~$915m of inflows

Fixed Income also continued to receive good flows (~$400m) and is another area which we expect to continue to grow as investors seek to create balanced portfolios using ETFs. Such growth is expected to be supported due to the increased product choice now available across both fixed and floating rate bonds.

Outflows were generally very low, and in fact, there was no broad product category that actually received net outflows – at a sub-category level investors the flows indicate that investors sold off large-cap Australian equities and Asian equities.

• Best performing exposures for the half-year were Asian Equities (Broad Asia and Korea) and Geared US

Equities

• Given the growth of the industry to date, we maintain the forecast we made at the end of last year and expect total industry FuM at end 2017 to be in the range of $32-$35B. Given current growth trajectory we expect that the industry will end up at the upper end of this range .

1 ‘Smart-beta’ defined as products which weigh constituents based on a methodology other than strictly market capitalisation/price

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Australian ETP Market Cap: July 2004 – June 2017 (A$m)

04 – 17 YTD CAGR 30%

CAGR: Compound Annual Growth RateSource: ASX, BetaShares

MARKET SIZE AND GROWTH: HALF YEAR 2017

MARKET CAP

• ASX Exchange Traded Funds Market Cap: $29.4B – new record high • Market cap growth for half year: 14%,+ $3.6B • Market cap growth for last 12 months: 31%,+ $6.9B

NEW MONEY • New unit growth for half year (units outstanding by number): 17% • Net new money for half year (units outstanding by $ value): +$2.8B

PRODUCTS • 212 Exchange Traded Products trading on the ASX • New products: 14 new products launched in the half year

TRADING VALUE • Increase in trading value of 10% compared to previous half year period

PERFORMANCE • Asian equities and Geared US equities the best performing products for the half

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By Market Cap

Ticker Product Issuer Market Cap Rank MovementSTW AU Equity SPDR S&P/ASX 200 Fund State Street $3,480,129,900 -IVV AU Equity iShares S&P 500 iShares $2,211,920,232 -VAS AU Equity Vanguard Australian Shares Index ETF Vanguard $1,851,890,000 -AAA AU Equity Betashares Australian High Interest Cash ETF BetaShares $1,236,310,100 +1IOO AU Equity iShares S&P Global 100 iShares $1,162,605,889 -1VTS AU Equity Vanguard US Total Market Shares Index ETF Vanguard $984,466,000 -VAP AU Equity Vanguard Australian Property Securities Index ETF Vanguard $864,046,000 -MGE AU Equity Magellan Global Equities Fund (Mgd Fund) Magellan $846,366,184 +1VEU AU Equity Vanguard All-World ex-US Shares Index ETF Vanguard $840,201,000 -1VHY AU Equity Vanguard Australian Shares High Yield ETF Vanguard $800,387,000 -2

TOP 10 PRODUCTS: HALF YEAR 2017

No changes to the members of the top 10 league ladder, but AAA and MGE each move up a slot compared to 6 months ago

State Street’s broad Australian equities ETF and BetaShares High Interest Cash ETF take out the #1 and #2 spot for largest inflows for the half.

Products with highest trading value are ‘the usual subjects’ with the exception of BBOZ and HVST. Interesting to see investors using the Australian Equities Strong Bear Hedge Fund so actively this half – proving ETPs are certainly being used both as ‘buy and hold’ but also trading products by certain investors

Top 10 Creations (by $) - YTD

Ticker Product Creation ValueSTW AU Equity SPDR S&P/ASX 200 Fund $353,445,600AAA AU Equity Betashares Australian High Interest Cash ETF $196,434,951IOZ AU Equity iShares Core S&P/ASX 200 ETF $127,141,407VGS AU Equity Vanguard MSCI Index International Shares ETF $120,806,263HVST AU Equity BetaShares Australian Dividend Harvester $108,371,729VAP AU Equity Vanguard Australian Property Securities Index ETF $100,430,709MVW AU Equity Market Vectors Australia Equal Weight $84,695,680IAF AU Equity iShares UBS Composite Bond Index Fund $81,266,034VEU AU Equity Vanguard All-World ex-US Shares Index ETF $77,575,750Gold AU Equity ETFS Physical Gold $77,137,211

Top 10 Redemptions (by $) - YTD

Ticker Product Redemption ValueIHOO AU Equity iShares Global 100 Hedged ($68,998,423)SFY AU Equity SPDR S&P/ASX 50 Fund ($37,126,543)IAA AU Equity iShares S&P Asia 50 ($35,776,062)IVE AU Equity iShares MSCI EAFE ($28,094,308)IJP AU Equity iShares MSCI Japan ($25,524,764)GDX AU Equity Market Vectors Gold Miners ETF ($24,280,525)VAS AU Equity Vanguard Australian Shares Index ETF ($21,307,436)ILC AU Equity iShares S&P/ASX 20 ($15,408,714)KII AU Equity K2 Global Equities Fund ($13,028,057)RDV AU Equity Russell High Dividend Australia Shares ETF ($9,637,901)

By Average Daily Trading Value (6 months)

Ticker Product Issuer ADTV 6 monthsSTW AU Equity SPDR S&P/ASX 200 Fund State Street $23,327,140AAA AU Equity Betashares Australian High Interest Cash ETF BetaShares $9,046,908VAS AU Equity Vanguard Australian Shares Index ETF Vanguard $7,801,268IVV AU Equity iShares S&P 500 iShares $5,021,511IOZ AU Equity iShares Core S&P/ASX 200 ETF iShares $3,453,879VHY AU Equity Vanguard Australian Shares High Yield ETF Vanguard $2,542,052USD AU Equity BetaShares US Dollar ETF BetaShares $2,411,106VAP AU Equity Vanguard Australian Property Securities ETF Vanguard $2,408,250BBOZ AU Equity BetaShares Australian Strong Bear Hedge Fund BetaShares $2,295,515HVST AU Equity BetaShares Australian Dividend Harvester Fund BetaShares $2,280,964

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ANALYSIS OF INFLOWS: FIRST HALF 2017

While passive index products remain by far the most popular, there is continued growth in the ‘smart beta’ category, which represented 20% of the flows this year so far. We are watching this area with great interest. Active ETF inflows remain low but our expectation is for their share of inflows to grow steadily as new products become available.

There has been a return to interest in Australian equities by ETF investors, although products providing exposure to international equities remain popular. Encouragingly, fixed Income ETFs continue to be allocated into, and this is an area we expect to continue to grow as more investors seek to create balanced portfolios using ETFs alone. There were no outflows at a broad category level.

Breaking down the broad categories into sub-categories provides a more nuanced view on where the money flows went so far this year. For example, although the broad categories produced no outflows, at a sub-category level we can see that investors sold off large cap Australian equities and Asian equities. In the case of the Asian equities exposure we expect this could be profit taking after very strong performance so far this year.

Inflows (by $) - YTD

Category 1 Inflow Value %Index $2,085,841,747 74%Smart Beta $567,345,302 20%Active $173,819,014 6%

Top 5 Category Inflows (by $) - YTD

Broad Category Inflow ValueAustralian Equities $972,161,079International Equities $915,345,142Fixed Income $414,704,486Cash $211,451,951Commodities $106,887,087

Top 5 Sub- Category Inflows (by $) - YTD

Sub-Category Inflow ValueAustralian Equities - Broad $667,459,693International Equities - Developed World $348,764,243Australian Bonds $302,040,803Australian Equities - High Yield $276,222,574International Equities - US $221,552,512

Top 5 Sub-Category Outflows (by $) - YTD

Sub-Category Outflow ValueAustralian Equities - Large Cap ($50,022,016)International Equities - Asia ($37,691,402)Australian Equities - Financials Sector ($5,252,537)International Equities - Geared ($1,219,429)Broad Commodities ($1,061,177)

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PERFORMANCE

Top Performing Products – Half Year 2017

Ticker Product Name Performance (%)

UBP UBS IQ MSCI ASIA APEX 50 19.4%

IKO iShares MSCI South Korea 18.5%

GGUS BetaShares Geared US Equities Fund 17.3%

ETPMPD ETFS Physical Palladium 17.2%

AUDS BetaShares Strong AUD Fund 16.8%

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AUSTRALIAN EXCHANGE TRADED FUND INDUSTRY: MONTH OF JUNE 2017

MARKET CAP & NEW MONEY • Market cap growth for month: 1.2%,+ $342m • New unit growth for month (units outstanding by number): 2.9% • Net new money (units outstanding by $ value): +$695m • It was a busy month in product launches, with 6 new products launched this month: BetaShares

Australian Bank Senior Floating Rate Bond ETF (QPON) - the first floating rate bond ETF available on ASX; iShares Core Cash ETF (BILL); iShares Enhanced Cash ETF (ISEC) and 3 new single bond exposures by XTBs

TRADING VALUE • Trading value increased 30% month on month and hit a new all-time record with $3.2B traded in the

month

PERFORMANCE • Geared Australian Dollar (AUDS) and Global Banks (BNKS) the best performing exposures for the month

TOP 10 PRODUCTS: JUNE 2017

By Average Daily Trading Value (20 days)

Ticker Product Issuer ADTV 20 days Rank MovementSTW AU Equity SPDR S&P/ASX 200 Fund State Street $27,517,060 -AAA AU Equity Betashares Australian High Interest Cash ETF BetaShares $13,953,150 -VAS AU Equity Vanguard Australian Shares Index ETF Vanguard $11,069,290 -IVV AU Equity iShares S&P 500 iShares $9,760,652 -IOZ AU Equity iShares Core S&P/ASX 200 ETF iShares $5,136,153 -VHY AU Equity Vanguard Australian Shares High Yield ETF Vanguard $4,536,858 +2VGS AU Equity Vanguard MSCI Index International Shares ETF Vanguard $3,835,862 +3USD AU Equity BetaShares US Dollar ETF BetaShares $3,162,717 +1QOZ AU Equity BetaShares FTSE RAFI Australia 200 ETF BetaShares $3,035,419 +8IEU AU Equity iShares S&P Europe 350 iShares $3,023,368 +4

Top 10 Creations (by $) - Month

Ticker Product Creation ValueAAA AU Equity Betashares Australian High Interest Cash ETF $44,214,748STW AU Equity SPDR S&P/ASX 200 Fund $37,875,040VAS AU Equity Vanguard Australian Shares Index ETF $35,156,496VGS AU Equity Vanguard MSCI Index International Shares ETF $35,069,562QOZ AU Equity BetaShares FTSE RAFI Australia 200 ETF $34,848,630PLUS AU Equity VanEck Vectors Australian Corporate Bond $34,481,700NDQ AU Equity BetaShares Nasdaq 100 ETF $29,101,600MVW AU Equity Market Vectors Australia Equal Weight $27,461,385VEU AU Equity Vanguard All-World ex-US Shares Index ETF $26,280,107DJRE AU Equity SPDR DJ Global Real Estate ETF $23,368,510

Top 10 Redemptions (by $) - Month

Ticker Product Redemption ValueIHVV AU Equity iShares S&P 500 Hedged ($28,559,176)SFY AU Equity SPDR S&P/ASX 50 Fund ($5,411,280)IJH AU Equity iShares S&P MidCap 400 ($4,840,862)IHK AU Equity iShares MSCI Hong Kong ($3,716,972)BBOZ AU Equity BetaShares Australian Equities Strong Bear Hedge F ($3,549,840)BEAR AU Equity BetaShares Australian Equities Bear Hedge Fund ($3,005,780)ISO AU Equity iShares S&P/ASX Small Ordinaries ($2,574,000)KSM AU Equity K2 Australian Small Cap Fund ($2,455,779)IXI AU Equity iShares S&P Global Consumer Staples ($1,651,868)KII AU Equity K2 Global Equities Fund ($1,590,180)

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Top Performing Products – Month

Ticker Product Name Performance (%)

AUDS AU Equity BetaShares Strong AUD Fund 7.7%

BNKS AU Equity BetaShares Global Banks ETF 4.0%

QAG AU Equity BetaShares Agriculture ETF 3.8%

HJPN AU Equity BetaShares WisdomTree Japan 3.3%

KSM AU Equity K2 Australian Small Cap Fund 2.7%

Top 5 Category Inflows (by $) - Month

Broad Category Inflow ValueAustralian Equities $240,371,983International Equities $214,194,651Fixed Income $120,422,388Cash $59,219,748Currency $26,662,650

Top Category Outflows (by $) - Month

Broad Category Outflow ValueShort ($4,988,315)