SPONSORED REPORT

These increasingly popular investment vehicles, which aim to tie their returns

to various investment indexes, now make up a dynamic universe of 5,200 exchange traded funds and products, according to statistics provided by ETFGI, an independent research and consulting fi rm in London. At the end of April 2014, there were 5,241 exchange traded funds (ETFs) and exchange traded products (ETPs) with nearly 10,240 listings from 221 providers trading on 59 exchanges around the globe, ETFGI reports.

“It is diffi cult to measure their exact growth. But ETFs continue to offer solutions to investors and are being used more and more frequently,”says Deborah Fuhr, a partner and co-founder of ETFGI.

Retail investors and fi nancial advisors are increasingly joining the ranks of institutional investors buying ETFs, which can be bought and sold like ordinary shares on a stock exchange. Investors are lured by the ability to gain access not only to traditional investments like equities and bonds, but to much riskier ventures in emerging and frontier markets or expensive assets like gold and real estate.

Dan Draper, managing director of Global ETFs at Invesco PowerShares, says the use of ETFs and Indexes took off after the 2008 credit crisis as investors looked for investments with liquidity

and transparency. The lower fees accompanying ETFs, compared with mutual funds, and the development of sophisticated technology that gives traders smooth access to markets around the world, has also propelled their growth.

“It truly is a twenty-fi rst century product,” says Draper, who is based at Invesco PowerShares’ offi ces outside Chicago. “There is liquidity. You can trade all day. There is instant gratifi cation.”

The appeal of alternative index ETFs

Howard Atkinson, global head of sales and marketing at Horizon ETFs Group in

Toronto, which manages about $10 billion in ETF assets worldwide, says the use of alternative index ETFs, frequently referred to as smart beta ETFs, has been expanding. Over the past six to seven years, investors are increasingly using ETFs tied to indexing products that use factors-based weighting, such as dividends or sales, rather than the traditional market-cap weighting strategy.

David Mazza, a vice president at State Street Global Advisors in Boston, says the ETF market’s expansion also is being fueled by investors eager to expand their portfolios into alternative asset classes,

ETFS/INDEX INVESTING

ETFs and Index Products Win Huge Favor Among Investors

Bolstered by new

strategies, favorable

regulations and

investors eager

to use investment

vehicles that are

more transparent

and liquid, the global

market in exchange

traded funds and

products is expected

to expand this year

by at least 20 percent

beyond the $2.49

trillion recorded at the

end of April 2014.

June 2014 • Institutional Investor Sponsored Report • 1

LYXOR ETFs DESIGNED FOR PERFORMANCE

T H E P O W E R T O P E R F O R M I N A N Y M A R K E T

ETFs & INDEXING ALTERNATIVE INVESTMENTS STRUCTURED INVESTMENTS ACTIVE QUANTITATIVE & SPECIALIZED INVESTMENTS

THIS COMMUNICATION IS FOR PROFESSIONAL CLIENTS ONLY.*AuM ETFs as of February 2014

These products comply with the UCITS Directive (2009/65/EC). Lyxor AM recommends that investors read carefully the “investment risks” section of the product’s documentation (prospectus and KIID). The prospectus and KIID in English are available free of charge on www.lyxoretf.com, and upon request to client-services@lyxor.com. Lyxor Asset Management (Lyxor AM), société par actions simplifiée having its registered office at Tours Société Générale, 17 cours Valmy, 92800 Puteaux (France), 418 862 215 RCS Nanterre, is authorized and regulated by the Autorité des Marchés Financiers (AMF) under the UCITS Directive and the AIFM Directive (2011/31/EU). Lyxor AM is represented in the UK by Lyxor Asset Management UK LLP, which is authorised and regulated by the Financial Conduct Authority in the UK under Registration Number 435658.

Standing among the most experienced ETF providers, Lyxor ranks 3rd in Europe with more than USD 46 billion of Assets under Management*. Lyxor offers a highly flexible opportunity to diversify your allocation across all asset classes. Lyxor is dedicated to providing performance, liquidity, risk control and transparency as illustrated in its ETF quality Charter.

To know more, visit lyxoretf.com

As more and more providers join the ETFs race, how do you choose the best ETFs?

Phot

o : E

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rin

such as gold, real estate and small-cap equities in emerging or even the riskier frontier markets. Investing directly in these markets would be too expensive or too dicey for some for some and ETFs offer a comfortable option, he says.

In addition, more so-called solutions-based ETF products are being developed outside the traditional areas of equities, fi xed-income and commodities. These solutions-based products meet a need, such as providing income or a hedge against infl ation, says Mazza, who is head of research at SPDR ETFs and SSgA Funds.

“It gives the benefi ts of active management by providing exposure to growth, value and quality. But the investments are implemented in a transparent and low-cost fashion,” says Mazza. “It blurs the line between alpha and beta.”

Fixed-income productsAnother trend in the ETF

investing arena is the greater use of fi xed-income products. Spurred in part by regulatory changes that have required bond dealers to make their holdings more transparent, directing funds into fi xed-income ETFs is a cost-effective way to move into this asset class.

Arnaud Llinas, Global Head of ETFs and Indexing at Lyxor Asset Management in Paris, says fi xed-income indexes have benefi ted as investors, fearful of defl ation in the European economies, have increasingly focused on yields and channeled money into Eu-ropean government bonds and emerging debt. As of March 31, 2014, Lyxor, a subsidiary of Société Générale Group, managed about $115.2 billion in assets, including $52.8 bil-lion in ETFs and indexes.

“In many ways, it is interesting to see how the development of the fi nancial crisis coincides with the emergence of a new investment trend among institutional investors towards innovative indices, generically referred to as ‘smart beta’,” says Llinas. Based on academic research carried out since the 1970s, these strategies break with the traditional approach to building an index portfolio.

The “smart beta” universe“In the smart beta universe,

references to the traditional and more volatile market-cap weighted indices no longer apply,” adds Llinas. “They are replaced by intrinsic, fundamental ways of measuring fi nancial strength and valuing portfolio securities, or by weightings based on the notion of risk, as in the case of maximum risk diversifi cation ‘ERC’ (equal risk contribution) indices.”

Llinas says the Lyxor Quality Income indexes, launched in 2012, belong to this fi rst group of fundamental indexes. Lyxor has a strong presence in the European ETF market and recorded net ETF infl ows of $1.6 billion during the fi rst quarter of the year. Its share of the European ETF market was 11.3 percent at the end of March 2014.

According to ETFGI, the ETFs and ETPs listed in Europe, the second-largest market for these investment vehicles, reached a record high of $449.7 billion at the end of April 2014 as $9.2 billion in new assets fl owed in during April. At that time the European ETF/ETP industry had 2,015 ETFs/ETPs, with 6,130 listings, from 50 providers listed on 25 exchanges across Europe.

Equity ETFs lead the wayThe United States is the

largest ETF/ETP market and stood at $1.76 trillion at the end of April 2014 as $19.9 billion in net new assets fl owed into the 1,577 products from 57 providers listed on three exchanges in the United States. Equity ETFs/ETPs gathered the largest net infl ows with US$16.8 billion, followed by fi xed income ETFs/ETPs with $3.1 billion. Commodity ETFs/ETPs experienced net outfl ows of $1.4 billion.

Japan is the third-largest market with $82.4 billion at the end of April, followed by Canada at $61.1 billion and the Middle East/Africa at $41.4 billion.

As with any investment, due diligence and education is key and State Street Global Advisors urges investors to closely examine the index against which an ETF is

2 • Institutional Investor Sponsored Report • June 2014

SPONSORED REPORT

ETFS/INDEX INVESTING

“It truly is a twenty-fi rst century product. There is liquidity. You can trade all day. There is instant gratifi cation.”

Dan Draper INVESCO POWERSHARES

“It gives the benefi ts of active management by providing exposure to growth, value and quality. But the investments are implemented in a transparent and low-cost fashion. It blurs the line between alpha and beta.”

David MazzaSTATE STREET GLOBAL ADVISORS

Global ETF and ETP Growth

2005 2006

Ass

ets

(US

$ B

n) # ETFs/E

TPs

2007 2008 2009 2010 2011 2012 2013

3,000

2,700

2,400

2,100

1,800

1,500

1,200

900

600

300

0

Source: etfgi.com

4,000

3,600

3,200

2,800

2,400

2,000

1,600

1,200

800

400

0

■ ETF Assets ■ ETP Assets ■ #ETFs ■ ETPs

“These trends are helpful for ETFs because it makes the process more transparent. It helps ensure that parts and labor are sold separately.”

Howard AtkinsonHORIZON ETFS GROUP

By David A. Koenig, CFA, FRMIndex Investment Strategist, Russell Investments

A core multi-asset investment portfolio is generally designed to provide broadly diversified exposure across asset classes

and investment styles. Within the equity portion of an investor’s core portfolio, traditional value and growth investments have long provided broad exposure to stocks with different characteristics and significant diversification benefits over time. Growth and value styles tend to move through extended cycles of leadership, with meaningful differentiation in performance between styles over time.

By including investments in both growth and value styles, investors can benefit from diversification while also having an opportunity to emphasize a particular style based on their long-term investment beliefs. Additionally, including separate allocations to each style gives investors the ability to make tactical adjustments to their style allocations over time based on their market views.

Blended portfolios that are diversified across value and growth styles can help ensure that investors have exposure to whichever style is leading in performance at a given point in time while ensuring they also have exposure to its counterpart should the style

leadership cycle change. This style diversification has historically helped deliver more consistent returns over time, which is especially important for a core investment portfolio.

Value and growth styles have historically delivered meaningfully different returns

Much attention has focused recently on the narrow return difference between value and growth in 2013, when the return gap between the Russell 1000® Growth Index and Russell 1000® Value Index was 0.9%. However, this was only the second time over the 20-year period from 1994–2013 in which the annual return difference was less than 1.0%. The previous occurrence was 2003, when the return gap was 0.3%.

Notably, in both 2003 and 2013, returns for both the growth and value indexes were exceptionally robust at approximately 30% or more. And in the years after 2003, the return difference widened again significantly in the subsequent years, with a difference of double-digits in four out of the next six years. So far in 2014, as of April 21, the return difference between value and growth has widened to 2.5%, suggesting that growth and value might be moving back into a period of greater differentiation.

Russell style indexes give investors better tools for more precise portfolio construction

Russell’s growth and value indexes

have become widely adopted as industry standards for both active and index-based investments since Russell Investments introduced the first style indexes in 1987. As of Dec. 31, 2013, approximately $227 billion in assets was invested directly in passive mutual funds and ETFs based on Russell growth and value style indexes, and a total of about $3.5 trillion in assets was benchmarked to Russell style indexes.1

The widespread support for the quality of Russell’s style index methodology is clearly evident in the assets invested in growth and value ETFs. As of Dec. 31, 2013, the largest ETF in each style category was based on a Russell growth or value index. Collectively, these six ETFs represented approximately $66 billion in assets as of the end of 2013.2 These products allow investors to gain exposure to each style across the capitalization spectrum.

Growth and value indexes help keep investors in style over time

Combining growth- and value-oriented investments in their portfolios gives investors an ability to implement a long-term strategic tilt toward growth or value while maintaining diversified exposure to both styles. Additionally, these tools give investors who have a near- to medium-term view the means to dynamically adjust their allocations as market conditions change. By including separate allocations to each style within a portfolio, investors can help ensure they have exposure to whichever style is leading at each point across the market cycle. ■

Institutional Investor Sponsored Statement • June 2014

Growth and value investing are always in style

RUSSELL INVESTMENTS

SPONSORED STATEMENT

www.russell.com/indexes

Americas: +1-877-503-6437

APAC: +65-6880-5003

EMEA: +44-0-20-7024-6600

CONTACT INFORMATION

1Russell Investments, Morningstar Direct, as of Dec. 31, 2013. 2Source: ETFGI, as of Dec. 31, 2013.

-50

-40

-30

-20

-10

0

10

20

30

40

50

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Tota

l Ret

urn

(%)

Russell 1000 Value Index Total Return Russell 1000 Growth Index Total Return

Source: Russell Investments, as of Dec. 31, 2013. Index performance is for illustrative purposes only. One cannot invest directly in an index. Past performance is not a guarantee of future results.

Growth and value styles show signifi cant differentiation over time

DO YOUR INVESTMENTS FALL SHORT OF YOUR INVESTMENT STRATEGY?

Before investing, carefully consider the funds’ investment objectives, risks, charges and expenses. To obtain a prospectus or summary prospectus, which contains this and other information, call 1.866.787.2257 or visit www.spdrs.com. Read it carefully.

The SPDR S&P MidCap 400 ETF Trust is an exchange traded fund designed to generally correspond to the price and yield performance of the S&P MidCap 400 Index.TM

ALPS Distributors, Inc., a registered broker-dealer, is distributor for the MidCap SPDR Trust, a unit investment trust. IBG-9404

An investment may look perfect to you on paper. But that’s no reason to believe

it will measure up to your strategic goals. Consider what State Street Global Advisors brings to the table. With over 120 SPDR® ETFs,

Interested in Equities? Fixed Income? Dividends? Whatever the market segment, you’ll get precisely what’s on the label. Nothing more. Nothing less. When it comes to building your portfolio, it’s

right product. To learn more, scan the QR code or visit spdrs.com.

tracking. Only about 1 percent of the ETFs do not track an index.

SSgA places a premium on education and has set up two websites, which include online tutorials, to guide investors through the process. Mazza urges special care and due diligence around the trading of exchange-traded notes, or senior subordinated debt, which also can be traded. “You need to understand them,” says Mazza, adding that they are accompanied by credit risk.

Another element behind the global ETF market’s growth has been the regulatory changes around the world aimed at prodding fi nancial markets toward greater transparency and openness. The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed by the U.S. Congress in 2010 in an attempt to thwart the recurrence of events that caused the 2008 fi nancial crisis, and the Alternative Investment Fund Managers Directive, that came into force in the European Union in July 2013 are examples of regulations with widespread market impact.

Regulations have helped ETFs

Rolf Agather, global manag-ing director of index research and innovation for Russell In-vestments, says regulations that have required greater transpar-ency surrounding the method-ology used to construct indexes also have helped develop the ETF market. He pointed to regulations laid down by the International Organization of Securities Commissions (IOSCO) in Madrid and the European Securities and Mar-ket Authority, based in Paris.

Russell Investment’s index data are used by many

ETF providers to create a variety of exchange-traded products based on the Seattle investment fi rm’s top U.S. and global equity index families.

Countries around the world are also moving ahead on the regulatory front. Investors in the United Kingdom now have to abide by the Retail Distribu-tion Review, set down by the country’s Financial Services Authority last year while in Canada, Phase II of the Client Relationship Model (CRM II) is being phased in. This regulation lays down disclo-sure requirements surrounding the costs and performance of investment vehicles. One pro-vision, for example, requires dealers and portfolio advisors to give their clients annual in-vestment performance reports, a task to be phased in gradu-ally starting in 2016.

In Australia, the Future of Financial Advice legislation, passed by the Australian Parliament in 2012 before taking effect in July 2013, aims to improve the quality of fi nancial advice for Australian consumers and expand their access to information. The provisions, being implemented by the Australian Securities & Investments Commission, include a ban on embedded fees in fi nancial services products. This should help the ETF market while hurting the mutual fund industry.

“These trends are helpful for ETFs because it makes the process more transparent,” says Atkinson. “It helps ensure that parts and labor are sold separately.”

Local-currency ETFs Another factor at play

is the potential for growth outside the United States in ETF products traded in local currencies. About 10 percent

of the current ETF holdings in the United States, for example, are held by non-U.S. entities. These institutional investors are becoming increasingly eager to diversify their portfolios with domestic products.

To fi ll this emerging need in Latin America for example, Horizon ETFs Group has launched two ETF products in Colombia and is considering the development of ETF products in Peru, Brazil and Chile. Pension plans in these countries are just turning to exchanged trade products, says Horizon’s Atkinson. “In 10 years, these markets will develop,” adds Atkinson, who is based in Toronto.

In Asia, the Chinese govern-ment’s relaxation of limits on foreign investors’ participa-tion in the Chinese fi nancial markets is encouraging. Draper points to the greater coopera-tion between the Hong Kong and Shanghai stock exchanges as expanding opportunities for foreign investors. Invesco PowerShares is already tap-ping into the Asian economic giant’s potential through a joint venture with a Chinese asset manager, Great Wall. Together, they have launched three ETFs in China.

Llinas at Lyxor says investing through an ETF in any market can give institutional investors easier access and liquidity. “In case the market suffers a period of heavy turbulence, allowing for a quick withdrawal,” he says.

Yet Fuhr doesn’t see any political or economic condition, other than a fi nancial crisis like the one that rocked the global economy in 2008 and 2009, from curtailing the ETF market’s expansion. “It would have to be a big disruption event to derail this market,” she says. ■

4 • Institutional Investor Sponsored Report • June 2014

SPONSORED REPORT

ETFS/INDEX INVESTING

Regulations that have required greater transparency surrounding the methodology used to construct indexes also have helped develop the ETF market.

Rolf AgatherRUSSELL INVESTMENTS

“In many ways, it is interesting to see how the development of the fi nancial crisis coincides with the emergence of a new investment trend among institutional investors towards innovative indices, generically referred to as ‘smart beta.’”

Arnaud LlinasLYXOR ASSET MANAGEMENT

PowerShares QQQ is based on the Nasdaq-100 Index®. The Fund will, under most circumstances, consist of all stocks in the Index. The Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization.Market volatility and volume may delay system access and trade execution.There are risks involved with investing in Exchange-Traded Funds (ETFs) including possible loss of money. The funds are not actively managed and are subject to risks similar to stocks, including those related to short selling and margin maintenance. Ordinary brokerage commissions apply. Shares are not FDIC insured, may lose value and have no bank guarantee.Invesco PowerShares does not offer tax advice. Investors should consult their own tax advisors for information regarding their own tax situations.While it is not Invesco PowerShares’ intention, there is no guarantee that the PowerShares ETFs will not distribute capital gains to their shareholders.

Shares are not individually redeemable and owners of the shares may acquire those shares from the Funds and tender those shares for redemption to the funds in Creation Unit aggregations only, typically consisting of 50,000 shares.PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC. ALPS Distributors, Inc. is the distributor for QQQ. Invesco PowerShares Capital Management LLC is not affiliated with ALPS Distributors, Inc.

An investor should consider the Fund’s Investment objective, risks, charges and expenses carefully before investing. To obtain a prospectus, which contains this and other information about the QQQ, a unit investment trust, please contact your broker, call 800.983.0903 or visit www.invescopowershares.com. Please read the prospectus carefully before investing.

When it comes to investing, unexpected barriers can hinder your portfolio’s success. However, the transparency of PowerShares QQQ allows for complete visibility of its holdings throughout the day, so you know exactly what you own with no surprises. PowerShares QQQ keeps your investments accessible, cost and tax efficient, and most importantly, gives you the trading flexibility you want.

powershares.com/transparent | @PowerShares