US ETF Insights 5 August 2016 Synthetic Equity & … America Synthetic Equity & Index Strategy US ETF Insights Date 5 August 2016 Deutsche Bank Markets Research ETFs are owned for

5 August 2016

US ETF Insights

Deutsche Bank Securities Inc.

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should beaware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should considerthis report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONSARE LOCATED IN APPENDIX 1.MCI (P) 057/04/2016.

North America Synthetic Equity & Index Strategy

US ETF InsightsDate5 August 2016

Deutsche BankMarkets Research

ETFs are owned for Investing, tradedfor LiquidityAfter 23 years, ETFs are still highly misunderstood. This is why.ETF users are by no means a uniform group. We identify two distinct types:ETF investors and ETF traders. Investors use ETFs as core building blocks intheir portfolios mostly for asset allocation purposes. Meanwhile, traders use ETFsas liquidity tools mostly for non-asset allocation purposes. ETF investors buyefficient access to asset class exposure; while ETF traders buy efficient accessto asset class liquidity. Investors own the majority of ETF assets and represent asmall fraction of ETF trading volumes; while traders own only a fraction of ETFassets, but represent the majority of ETF trading volumes.

85% of ETF assets are held for asset allocation purposes, but only represent14% of ETF trading...We estimate that institutional and retail investors own 47% and 38% of ETF assetsfor asset allocation purposes, respectively. Among the major three asset classes,Fixed Income ETFs have the highest asset allocation ETF ownership with 93%;while equity ETFs have the lowest asset allocation ETF ownership with 83%.

...while the remaining 15% held for non-asset allocation purposes represents86% of ETF traded volumeWe estimate that institutions account for the bulk of the non-asset allocationownership with 12% used for cash management (5%), or pseudo futures-likeactivities such as risk hedging (7%). On the other hand, we estimate that retailinvestors account for only 3% of non-asset allocation ETF ownership.

Commodity, currency, volatility, leveraged, and inverse products are mainlyused as trading toolsBased on average holding period analysis, Equity and Fixed Income ETFs aremostly used as asset allocation tools. Commodity and Currency ETPs, on theother hand, clearly reflect a more tactical usage; and Volatility products are almostexclusively being used as trading tools. Furthermore, Smart beta ETFs are mostlybeing used as strategic asset allocation tools; while Leveraged and Inverse ETPsare mostly being used as trading tools.

Average Holding Period (AHP), along with ETF flows provide insight about aproduct's usageWe found that products used mainly for asset allocation have a very distinctpattern with smooth flows and AHP closer to 180 days or beyond; while productsmostly used as liquidity tools have volatile flows and AHP closer to 30 days orlower.

Sebastian Mercado, CFA

Strategist

+1-212-250-8690

Distributed on: 08/05/2016 21:58:14GMT

mailto:[email protected]

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US ETF Insights

Page 2 Deutsche Bank Securities Inc.

Investing vs TradingOne of the main criticisms of ETFs has been the fact that their ability to tradecan induce excessive trading activity by investors leading to eventual poor resultsdue to transaction costs and failed market timing attempts. This statement isfrequently linked to another common belief that ETFs are mainly a retail product.Thus, the combination of these two suppositions has quickly lead some to theconclusion that ETFs are some sort of vehicle of mass destruction of wealth forthe less sophisticated retail investor, and therefore should be closely monitoredand seen with skepticism.

This belief, however, could not be farther from the truth and it is the result oftrying to understand this new product utilizing a wrong and outdated framework.In previous reports, we have discussed extensively who the major users ofETFs are and have demonstrated how ETFs have eventually become a productdominated by institutional ownership1. Now we take further steps to understandthe differences between investing in ETFs and trading ETFs. More specifically,we use ETF Average Holding Period to obtain a better understanding of eachproduct's trading profile, and fine tuning specific investment usage estimations.

ETFs are owned by those that need to invest,and are traded by those that need liquidity

When it comes to ETFs, investing is usually driven by asset allocation of strategic ortactical nature where the fund plays a major role in the portfolio construction. On theother hand, trading is usually driven by short-term non-asset allocation purposeswhere the product plays the role of liquidity enabler to perform tasks such as cashmanagement or risk management. Therefore ETFs are not just investment vehicleslike mutual funds. In fact, ETFs are two products in one. On one side, they areinvestment tools and offer investors access to a desired exposure for a specificfee; while on the other side, they are liquidity tools which offer traders asset classliquidity at a specific cost. Thus, ETFs are owned by those that need to invest, andare traded by those that need liquidity; which most of the time, are not the sameindividual or entity.

Why it is important to understand the differences between ETF investing andETF tradingUnderstanding these differences is vital to clarify market participant'smisconceptions about ETFs. Because only after understanding this they willrealize that:

1. ETF investing and ETF trading are not the same

2. Most investors don't trade ETFs excessively, but actually hold themstrategically

3. Traders focus on a specific and reduced set of ETFs which concentratemost of the ETF volume activity and meet their liquidity demands

4. Trading activity is dominated by institutional traders

5. Investment activity is dominated by institutional and retail investors

ETFs don't only provide an efficient accesssolution for investors, but also provide anefficient access to liquidity for traders in aworld where liquidity has become a scarceresource

For these reasons, ETFs don't only provide an efficient access solution for investors,but also provide an efficient access to liquidity for traders in a world where liquidityhas become a scarce resource.

1 See "ETF Institutional Ownership nears 60% at the end of 2015" published on Mar 22, 2016.

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Deutsche Bank Securities Inc. Page 3

ETF Average Holding Period (AHP) Analysis

ETF AHP is the average time an ETF is heldby an investor/trader in days

Please meet the ETF Average Holding Period (AHP), the latest addition to our ETFresearch library. We define ETF AHP as the average time an ETF is held by aninvestor/trader in days. It is obtained by dividing 365 by the ETF turnover. Wedefine ETF turnover as the ratio of ETF value traded to ETF average assets and it iscalculated by dividing the ETF Total Value Traded in a specific period by the averagelevel of ETF assets under management during such period.

■ ETF AHP = ( 365 / Turnover ) [days]

■ Turnover = Total Value Traded / Avg. Assets Under Management

For our analysis we took a sample including all ETFs, ETVs, and ETNs with over$100 million in assets under management at the end of 2014. Our sample included784 products which although represented only 39% of the listed products, itaccounted for more than 98% of the average assets and value traded during 2015in both cases. We believe this sample to be representative and significant forour analysis because our study is centered around investment (as suggested byassets) and trading (as provided by value traded). We calculated individual AHPfor each product in our sample for the year 2015 and we later aggregated andanalyzed these data.

Longer AHP suggests asset allocation usage; while shorter AHP suggeststrading tool usageLonger holding periods are related to investment usage of products for strategicor tactical asset allocation purposes; while shorter holding periods are related toproduct usage as a trading tool for liquidity purposes. Furthermore, after analyzingthe holding period data we have set different levels of AHP for different productprofiles. Thus, we see products with an AHP of less than 30 days as trading tools,products with an AHP of over 180 days as strategic asset allocation vehicles;and those products between 30 and 180 days as having a mixed profile betweentrading and tactical asset allocation tool.

Products used as asset allocation tools or with mixed usage make up the majorityof listed products (~90%) and assets (~80%) in our sample, but less than 30%of the traded value. This supports our view that: (1) investors holding ETFs, andother similar products, for asset allocation purposes represent the majority of ETFowners, and (2) these investors are very unlikely to engage in excessive trading.On the other hand, traders make up just a small fraction of ETF ownership, butconcentrate most of the traded value as a result of their liquidity requirements.

Institutions are behind most short-term ETPtrading, while retail investors are more likelyto hold ETPs strategically for investmentpurposes.

Furthermore, our analysis shows that within ETPs (i.e. ETFs and ETVs) excludingleveraged and inverse products, a higher institutional ownership is related to ashorter average holding period. Or in other words, ETPs with a high institutionalownership concentrate most of the ETP trading; while ETPs with a less relevant levelof institutional ownership play a less significant role in ETP trading. This stronglysuggests that it is institutional investors doing most of the ETP trading, and notretail investors. Actually, retail investors are more likely to hold ETPs strategicallyfor investment purposes.

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Figure 1: Product metrics market share by AverageHolding Period bucket

Source: Deutsche Bank, Bloomberg Finance LP, FactSet.

Figure 2: Average Holding Period and Institutional ETPOwnership

Source: Deutsche Bank, Bloomberg Finance LP, FactSet. Excludes Leveraged and Inverse Products, andETNs.

In 2015, ETFs had an average holding period of 143 days; while ETVs and ETNshad an average holding period of 87 and 326 days, respectively. These figuressuggest that in general ETNs are mostly used as a strategic asset allocationproduct2, while ETFs are used for both trading and asset allocation, and ETVs areused mostly for trading and tactical asset allocation. However, we recognize thatalthough there are some general trends in product holding periods and usage, wealso see significant differences among individual products.

Equity and Fixed Income ETFs are mostly used as asset allocation toolsVolatility products are almost exclusivelybeing used as trading tools

Our average holding period analysis suggests that Equity and Fixed Income ETFsare mostly used as asset allocation tools. Moreover we noticed that Equity ETFswith an AHP of 137 days had a relatively higher tactical component when comparedto Fixed Income ETFs with an AHP of 170 days. Commodity and Currency ETPs,on the other hand, clearly reflected a more tactical usage suggesting that not onlytraders, but also investors use these products for short term purposes. And asprobably expected, Multi Asset ETFs with an AHP of over 200 days displayed aclear strategic asset allocation pattern; while Volatility ETPs and ETNs with an AHPof less than 5 days showed an striking contrast confirming the almost-exclusiveusage of these products as trading tools.

We also see differences in the average holding period among different ETP issuerofferings. For example among the main ETP providers, ETFs from Vanguard,Schwab, and Guggenheim are mostly being used as strategic asset allocationtools; while ETFs from ProShares and State Street are mostly being usedas trading tools. At the same time, other providers such as BlackRock andWisdomTree exhibit a mixed usage according to AHP figures.

2 This is mostly true as many ETNs are the result of customized exposures offered to specific investorsand therefore have a very low number of investors. However, there are some notable exceptions such assome Volatility, MLP, and Commodity ETNs.

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Figure 3: ETP Average Holding Period by asset class

Source: Deutsche Bank, Bloomberg Finance LP, FactSet. ETNs are excluded from all asset classes exceptVolatility.

Figure 4: ETP Average Holding Period by Top 10 ETPIssuer

Source: Deutsche Bank, Bloomberg Finance LP, FactSet. ETNs are excluded. Top 10 according to avg.AUM in 2015.

Smart beta ETFs are mostly being used asstrategic asset allocation tools

From a management style perspective, products employing a smart beta approachare mostly being used as strategic asset allocation tools. Meanwhile actively-managed products which are also mostly used as asset allocation tools alsodisplay some degree of tactical usage. On the other hand, products following betaindices are being used as both trading and asset allocation tools according to AHPreadings.

Leveraged and Inverse ETPs are mostlybeing used as trading tools

Finally, our analysis by product type3 suggests that asset allocation and cashmanagement products are mostly being used as strategic asset allocation tools,with some degree of tactical asset allocation usage in the case of cash managementETPs. On the other hand, there is a stark contrast with pseudo futures and leveragedand inverse ETPs which are mostly used as trading tools.

Figure 5: ETP Average Holding Period by managementstyle

Source: Deutsche Bank, Bloomberg Finance LP, FactSet. ETNs are excluded.

Figure 6: ETP Average Holding Period by product type

Source: Deutsche Bank, Bloomberg Finance LP, FactSet. ETNs are excluded.

At an individual level we see that the products with the lowest average holdingperiod are dominated by volatility, leveraged, inverse, or pseudo futures products.

3 See our repot titled "A Stock Pickers Guide to ETFs" published on June 5th, 2015 for additional details anddefinitions of different product types within ETFs, or Appendix A for a summary of definitions.

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Figure 7: Top 100 ETPs & ETNs with the lowest AHP (1-50)

Source: Deutsche Bank, Bloomberg Finance LP, FactSet. AHP is for 2015, ADV and AUM are latest available. PF: Pseudo Futures, CM: CashManagement, AA: Asset Allocation, LevInv: Leveraged and Inverse

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Figure 8: Top 100 ETPs & ETNs with the lowest AHP (51-100)

Source: Deutsche Bank, Bloomberg Finance LP, FactSet. AHP is for 2015, ADV and AUM are latest available. PF: Pseudo Futures, CM: CashManagement, AA: Asset Allocation, LevInv: Leveraged and Inverse

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ETFs are mostly owned for asset allocation, and traded forliquidity needs

Are ETFs an investment tool, a trading vehicle, or both? The debate can go onand on. However, in this report we leverage our previous research in the areasof ETF ownership, product usage, and our new analysis in the average holdingperiod space in an effort to introduce a quantitative framework that would helpus to throw some light on the debate.

ETF ownership as investment tool for asset allocation estimated at 85%Our quantitative framework for ownership by usage has two legs: an institutionalleg and a retail leg. The Institutional calculations involve 3 steps:

1. Institutional Ownership: first we calculate the institutional ownership perinstitution type for ETFs and other similar products.

2. Product Usage: we, then, group institutions under their most likely ETFusage. For example, assets owned by Hedge Funds and Brokers would begrouped under Pseudo Futures usage; while assets owned by InvestmentAdvisers and Private Banks/Wealth Management would be grouped underAsset Allocation or Investment usage. The Cash Management usagegroup, on the other hand, would include ETF institutional ownershipby Mutual Funds, Pension Funds, and Insurance Companies, amongothers. We consider Investment usage as being driven by Asset Allocationpurposes; while Pseudo Futures and Cash Management usage as beingdriven by Non-Asset Allocation purposes.

3. Average Holding Period: now, because not all Investment Advisers useETFs for Asset Allocation, or not all Hedge Funds use ETFs as PseudoFutures, we also incorporate an adjustment factor based on the ETF'saverage holding period. Thus, ETFs with an AHP closer to 30 days or lowerwould have a larger non-asset allocation component, while ETFs with anAHP closer to 180 days or higher would have a larger asset allocationcomponent.

The combination of institutional ownership, product usage, and average holdingperiod can give us a more precise estimate of how much of the institutionalownership is driven by asset allocation or by non-asset allocation purposes.

On the retail front we consider that most retail ownership is driven by assetallocation purposes, however we also apply an adjustment based on ETF averageholding period in order to calculate a level of non-asset allocation usage amongretail investors.

As of the end of 2015, we estimate that85% of ETFs were owned for asset allocationpurposes; while only 15% were owned fornon-asset allocation purposes

As of the end of 2015, we estimate that 85% of ETFs were owned for assetallocation purposes; while only 15% were owned for non-asset allocation purposes.This supports our long-standing belief that ETFs are mostly owned as an investmenttool for asset allocation purposes. In fact, we estimate that institutional andretail investors own 47% and 38% of ETF assets for asset allocation purposes,respectively. Furthermore, we estimate that institutions account for the bulk ofthe non-asset allocation ownership with 12% used for cash management (5%),or pseudo futures-like activities such as risk hedging (7%). On the other hand,we estimate that retail investors account for only 3% of non-asset allocation ETFownership. ETVs, and ETNs have similar ownership breakdowns with 84% and86% owned for asset allocation purposes, and 16% and 14% owned for non-assetallocation purposes, respectively. However the non-asset allocation component

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among retail investors is relatively higher than the 3% in ETFs with a 7% in bothETVs and ETNs.

Figure 9: 2015 Ownership by usage estimates - ETFs, ETVs, ETNs

Source: Deutsche Bank, Bloomberg Finance LP, FactSet

We could see anywhere between $30bnto $40bn of additional Fixed Income ETFassets driven by liquidity-induced non-assetallocation ownership

Among the major three asset classes, Fixed Income ETFs have the highest assetallocation ETF ownership with 93%; while equity ETFs have the highest non-asset allocation ETF ownership with 17%. This suggests that non-asset allocationownership within fixed income ETFs at a 7% is in its infancy, and if it were to expandlike in the case of Equities or Commodities (14%) we could see anywhere between$30bn to $40bn of additional Fixed Income ETF assets driven just by ETF liquiditydemand.

Figure 10: 2015 Ownership by usage estimates - Equity, Fixed Income, Commodity


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ETF trading as liquidity tool for non-asset allocation estimated at 86%ETF traders buy the ETF liquidity, notso much the exposure which eventuallybecomes a secondary decision factor amonga group of ETF peers.

Most people draw wrong conclusions from the ETF market because they forget thatthere are two parts to the usage equation, or ETF activity. As we have previouslymentioned in this report, ETFs can be used as investment tools for asset allocation,or liquidity tools for trading. Most people get the first part of the equation (i.e.the investment) right, but they usually are less precise in their understanding ofthe second part: the trading aspect of it. Investors that buy ETFs do so mostly forthe exposure, and efficient access; however traders that buy ETFs do so for theirliquidity. Yes! traders are buying the ETF liquidity, not so much the exposure. Nowdon't get us wrong, exposure still matters to traders, but it becomes a secondarydecision factor within a group of ETF peers.

Previously we estimated that about 15% of ETF ownership is driven by non-assetallocation purposes, but how much of the value traded in ETFs is driven by non-asset allocation purposes? The answer will probably come as a surprise to many.

We utilized our average holding period calculation to estimate the amount of valuetraded for asset allocation and non-asset allocation purposes. More specifically,we considered that the value traded for ETFs with an AHP below 30 days was100% driven by non-asset allocation purposes; while for those ETFs with an AHPover 180 days we assumed 100% driven by asset allocation purposes. ETFs withan AHP between 30 and 180 days would have their value traded split into assetallocation and non-asset allocation proportionately.

We estimate that traders using ETFs asliquidity tools for short term objectivesaccounted for 86% of ETF trading activity in2015, despite only representing 15% of ETFownership

Based on our methodology, we estimated that 86% of all ETF value traded during2015 was driven by non-asset allocation purposes. In other words, traders usingETFs as liquidity tools for short term objectives accounted for 86% of ETF tradingactivity, despite only representing 15% of ETF ownership. Again, with the riskof repeating ourselves, we would like to restate that these traders are mostlyinstitutional investors; furthermore this activity is not the result of excessive tradingfor the sake of it or an attempt to time the market, but in most cases it is theresult of the activity required to fullfil the liquidity demands of institutional marketparticipants. For example, Hedge Funds will demand liquidity for risk management,brokers will demand liquidity for market making activities, and mutual funds willdemand liquidity for cash management. ETVs and ETNs present similar readings.

Figure 11: 2015 Trading by usage estimates - ETFs, ETVs, ETNs


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ETF evolution insightsETF product evolution theory

ETF product evolution has been a favorite topic of discussion in our researchreports in recent years. Nevertheless, we present a summary of our theory of ETFProduct Evolution as a reminder to the new reader.

All ETFs are created equal, but some have the potential to progress to a second orthird stage of evolution. Each evolution stage carries specific ETF characteristicsand usage implications.

1. First Stage/Asset Allocation: this is the default stage in which all ETFs arecreated equal as investment tools for asset allocation usage. Moreover,most ETFs actually stay in this first evolution stage forever. At this stage,ETFs are highly dependent on the primary ETF liquidity or the liquidity ofthe underlying constituent basket.

2. Second Stage/Cash Management: as some ETFs begin to developsize and secondary market liquidity they start to expand their usagealternatives to include cash management functions in addition to assetallocation; thus reaching a second stage of evolution. At this second stageof progression, ETFs become slightly less dependent on primary liquidity,and therefore are better equipped to meet some of investors' non-assetallocation liquidity demands.

3. Third Stage/Pseudo Futures: a more reduced number of ETFs takesevolution one step further to reach a third level in which the ETF enjoysextremely abundant liquidity levels, but not only limited to the ETF itself,but also manifested in ETF options and ETF short interest. In fact, it is thiscombination of liquidity interactions which turns these ETFs into what wecall a Pseudo Futures ETF. A Pseudo Futures ETF is an ETF that is ableto handle not only asset allocation, or cash management requirements,but also risk management demands. These ETFs develop liquidity of itsown, becoming practically independent of their primary market liquidity.In general, this third stage of evolution is limited to only one ETF per assetclass or benchmark.

Understanding ETF usage evolution through avg. holdingperiod and flow volatility

We found that average holding period for ETFs is a fluid metric which can helpunderstand ETF product evolution. In addition, we noticed that ETF flow volatilitypatterns can also help understand product evolution. As a matter of fact, aswe examine product evolution histories for pseudo futures ETFs we notice twodistinct patterns, which at this point we will call the earlier and the latter patterns,respectively.

During the earlier pattern, the products are relatively new and usually have higheraverage holding periods, which may present significant oscillations in the firstyears as the trading activity accommodates to new asset levels. On the flows side,these products tend to present flat or steady inflow trends as a result of productadoption or investment usage. This is what we call a product evolution seasoningperiod (most ETFs never pass beyond this period).

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In the latter pattern, we notice a sustained and consistent decrease in the averageholding period until the average holding period settles usually below tradingtool levels (i.e. AHP<30 days). On the flows side, we notice that flow volatilityincreases as a result of increased ETF usage for short term non-asset allocationactivities. This is the final evolution state for an ETF, and so far this seems to bea permanent state once reached.

iShares' strategy back in 2012 whichdesignated IVV and IJR as part of theCore product family has apparently beengenerating the expected results as moreinvestors seem to be using these productsfor strategic asset allocation purposes inrecent years.

SPY and IWM, two of the most prominent Pseudo Futures ETFs, clearly exhibitthese patterns. However, as we examine other ETFs with similar exposures such asIVV and IJR we don't see much evidence of final evolution state. In fact IVV and IJR,both of which at some point displayed some flow volatility and low AHP, have seenan increase in AHP in recent years, particularly IJR. We believe that this suggests anincrease in investment usage for asset allocation purposes. This would also confirmthat iShares' strategy back in 2012 which designated these ETFs as part of theCore product family has apparently been generating the expected results as moreinvestors seem to be using these products for strategic asset allocation purposes inrecent years. On the other hand VOO and VB, which also track similar benchmarks,seem to still be mostly in the first evolution stage as activity is mainly dominatedby strategic asset allocation usage (VB flow spikes are related to rebalances).

Figure 12: The road to becoming a Pseudo Futures ETF:SPY (Eq US Large Cap)

Source: Deutsche Bank, Bloomberg Finance LP.

Figure 13: The road to becoming a Pseudo Futures ETF:IWM (Eq US Small Cap)


Figure 14: Second stage is the limit: IVV (Eq US LC)


Figure 15: Second stage is the limit: IJR (Eq US SC)


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Figure 16: Mostly an Asset Allocation ETF: VOO (Eq USLarge Cap)


Figure 17: Mostly an Asset Allocation ETF: VB (Eq USSmall Cap)


Reading the patterns: trading tools versus asset allocation toolsWe can also observe extreme usage behaviors in some products. For example,VXX, an ETN which tracks Volatility based on VIX futures contracts, shows a cleartrading tool pattern where flows exhibit volatility, and AHP not only begins at alow level (9 days) but drops drastically to a stable level around 1 day. This behaviorstrongly suggests that products like VXX are almost exclusively used as liquiditytools by traders for non-asset allocation purposes. This finding is very reassuringbecause it confirms that the product is being used by the right group of users forthe right purpose. In addition, this also confirms that concerns about wrong usageof this type of products by less sophisticated investors are overstated; and evenif these concerns were to materialize, this would be an exception not the norm.

On the other hand, SCHB, an ETF which tracks a broad US market equity index,shows a clear investment tool pattern where flows are very steady and consistent,and AHP increases steadily beyond 200 days staying above that level. Thisbehavior strongly suggests that products like SCHB are almost exclusively usedas investment tools for asset allocation purposes, mostly of strategic nature. Thepattern also suggests that ETF investors owning this type of products are usuallybuy-and-hold investors using the ETF as a core building block of their portfolio.

Figure 18: Extreme behavior: VXX (Volatility), an almost-exclusively trading vehicle


Figure 19: Extreme Behavior: SCHB (US Broad), analmost-exclusively asset allocation vehicle


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A look at other asset classes: Real Estate and HY CreditThese patterns can be seen across all products and asset classes. Thus, as alast exercise to help us exemplify the value that this information can providefor understanding ETF usage, we take a look at some US Real Estate and HYCorporate Credit ETFs.

VNQ and IYR are two very popular ETFs offering exposure to US Real Estate viaUS REITs. VNQ with more than $35bn in assets is the largest Real Estate ETF andhas very good liquidity; however IYR, despite the fact of being more than 7 timessmaller than VNQ in terms of assets, is even more liquid. A fact which could beeasily understood after looking at the flow volatility and AHP patterns. Actually,VNQ has a steady stream of flows, and an AHP above 100 days; characteristicof an ETF being used as an asset allocation tool - mostly strategically with sometactical usage. On the other hand, IYR displays a clear pattern of flow volatilitywith a very low AHP (~10 days) representative of an ETF being used as a tradingtool, and very characteristic of Pseudo Futures.

Figure 20: The Pseudo Futures ETF for US Real Estate:IYR


Figure 21: Despite being the largest US Real Estate ETF,VNQ only has 2nd stage potential


Within HY Corporate debt ETFs, the space activity in assets as well as in tradingis clearly dominated by two ETFs: HYG and JNK. However, as we have statedbefore, there is usually room only for one Pseudo Futures ETF per asset class.Then, which of these two ETFs is the Pseudo Futures for the asset class. Weusually deem HYG as the Pseudo Futures one, but is this designation confirmedby the flow and AHP patterns?

We observe that in both cases there is flow volatility and a consistent downwardtrend in AHP. However, although in both cases the AHP is relatively low, theAHP of HYG is lower at about 20 days compared to JNK's AHP of just under 40days. Therefore we can confirm that although both products are heavily used asliquidity tools, HYG maintains its Pseudo Futures title. We believe that HYG's edgeis probably due to its options activity; for example, in July HYG traded an averagedaily notional value of $403mn - almost 100 times more than JNK options.

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Figure 22: The Pseudo Futures ETF for US HY CorporateCredit: HYG


Figure 23: Despite impressive activity, JNK is still oneevolution step behind HYG


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Appendix A: DefinitionsETP Universe Definitions

Exchange-Traded Products (ETPs)We define an exchange-traded product (ETP) as a secure (funded or collateralized)open-ended exchange-traded equity with no embedded optionality and market-wide appeal to investors. This includes exchange traded funds (ETF), andexchange-traded vehicles (ETV). The vast majority of instruments are ETFs (~98%in AUM).

Exchange-Traded Funds (ETFs)ETFs are open-ended funds which are listed on an exchange and offer intra-daydual liquidity to access diversified investments in a transparent, cheap, and taxefficient way. ETFs indexed to equity and fixed income benchmarks are registeredunder the investment company act of 1940. Only physical index replicationtechniques are permissible by this legislation while synthetic replication is notallowed.

Exchange-Traded Vehicles (ETVs)This terminology typically refers to grantor trusts that exist in the US market.These instruments track primarily commodity benchmarks. They differ fromETFs in that they are registered under the Securities Act of 1933 and not theInvestment Company Act of 1940, hence they are not classed as funds. Vehiclesthat replicate commodity benchmarks, more often known as pools, and fundstargeting alternative index returns are formed under the Commodities ExchangeAct and are listed under the 33 Securities Act, and report under 34 Corporate Act.

Exchange-Traded Notes (ETNs)ETNs are senior, unsecured, unsubordinated debt securities issued by anunderwriting bank. As a debt obligation these are not funded, thereforeperformance delivery depends on the credit worthiness of the issuer. They usuallytrack an index and are listed on an exchange. Like most debt securities, they alsohave a maturity date.

Management Style or Product Strategy Definitions

BetaThis is the main group with the largest number of products and assets.Within this category we account for all those ETFs that track an index whichemploys a market capitalization weighting methodology, and a simple selectionmethodology usually involving screenings such as minimum market cap andliquidity levels, or profitability levels. ETFs in this group are also referred to as“plain-vanilla” ETFs. Some examples of indices falling within this category are:S&P 500, S&P 400, S&P 600, MSCI EAFE, MSCI EM, Russell 2000, and Russell1000, to name a few.

Beta+In this group we include every product that offers any level of leverage or inverseimplementation. For example, an ETF offering access to twice the daily returnsof the S&P 500 on either direction (long or short) would be classified under thiscategory.

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ActiveClassifying products in this group is still easy; basically if the ETF doesn’t trackany index then we classify the fund as active.

Enhanced Beta (aka Smart Beta)This category is reserved for those ETFs that also track an index, but whichfollow more elaborated strategies. After defining an index universe, there aretwo main levers that determine most of the risk/return profile of the index: (1)the selection criteria, and (2) the weighting criteria. In their selection process,enhanced beta ETFs usually employ additional screening processes and scoringsystems involving multiple factors beyond just minimum market cap and liquiditylevels. For example, they could include growth or value scores, dividends paidor dividend yield, earnings, volatility, or momentum screens, to name a few. Theweighting methodology of enhanced beta ETFs is usually anything but marketcap weighted, it can include simple equal weighting or variations of it, optimizedweights, and other metric-specific weights such as those based on dividendspaid, inverse volatility, dividend yield, fundamental multi factor scores, earnings,and revenues, to name a few. An enhanced beta ETF will either have a non-traditional selection methodology, a non-traditional weighting methodology, or acombination of both.

Product Type Definitions

Asset Allocation ETFsThis group covers all ETFs with exception of levered and inverse products. Theseare usually good products for market access strategies, portfolio completion, andcore positions. They are also efficient building blocks for multi asset strategies.When selecting these products, major emphasis should be set on the desiredexposure, tracking efficiency, primary liquidity (i.e. the liquidity of the underlyingbasket), and cost.

Cash Management ETFsThis group covers a more selected group of ETFs which in addition to beinggood asset allocation tools, also serves a series of cash management portfolioneeds. For example, these products are very good for equitizing cash betweentransitions, around reporting periods (window dressing), and during tax lossharvesting. These ETFs usually have good liquidity, large fund size, and lowcost, all of which makes it easier to execute sizeable short-term transactions,therefore secondary market liquidity and fund size tend to be a more relevantfactor compared to asset allocation ETFs. The most popular asset allocation usageof these funds is as core building blocks.

Pseudo Futures ETFsThis group covers an even more selected sample of ETFs which in additionto being good asset allocation and cash management tools can also be usedfor fulfilling risk management functions such as risk hedging, portable alphastrategies, or tactical shorts. Many times they also trade at a cheaper level thantheir underlying basket, and offer large amounts of liquidity which can make themattractive for market making activities as well. Secondary and short liquidity (easeto borrow), and fund size tend to be more relevant characteristics at the momentof selecting this type of ETFs. There is usually no more than one pseudo futuresETF per asset class. The most popular asset allocation usage of these fundsis among portfolios that require more liquidity given their size or more tacticalnature.

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Appendix 1

Important Disclosures

Additional information available upon request

*Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced fromlocal exchanges via Reuters, Bloomberg, and other vendors. Other information is sourced from Deutsche Bank, subjectcompanies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other thanthe primary subject of this research, please see the most recently published company report or visit our global disclosurelook-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition,the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendationor view in this report. Sebastian Mercado

Hypothetical Disclaimer

Backtested, hypothetical or simulated performance results have inherent limitations. Unlike an actual performancerecord based on trading actual client portfolios, simulated results are achieved by means of the retroactive applicationof a backtested model itself designed with the benefit of hindsight. Taking into account historical events the backtestingof performance also differs from actual account performance because an actual investment strategy may be adjustedany time, for any reason, including a response to material, economic or market factors. The backtested performanceincludes hypothetical results that do not reflect the reinvestment of dividends and other earnings or the deduction ofadvisory fees, brokerage or other commissions, and any other expenses that a client would have paid or actually paid.No representation is made that any trading strategy or account will or is likely to achieve profits or losses similar tothose shown. Alternative modeling techniques or assumptions might produce significantly different results and prove tobe more appropriate. Past hypothetical backtest results are neither an indicator nor guarantee of future returns. Actualresults will vary, perhaps materially, from the analysis.

Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share pricefrom current price to projected target price plus pro-jecteddividend yield ) , we recommend that investors buy thestock.Sell: Based on a current 12-month view of totalshareholder return, we recommend that investors sell thestockHold: We take a neutral view on the stock 12-months outand, based on this time horizon, do not recommend eithera Buy or Sell.

Newly issued research recommendations and targetprices supersede previously published research.

?Regulatory Disclosures?1.Additional Information?

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Information on ETFs is provided strictly for illustrative purposes and should not be deemed an offer to sell or asolicitation of an offer to buy shares of any fund that is described in this document. Consider carefully any fund'sinvestment objectives, risk factors, and charges and expenses before investing. This and other information can be foundin the fund's prospectus. Prospectuses about db X-trackers funds and Powershares DB funds can be obtained by calling1-877-369-4617 or by visiting www.DBXUS.com. Read prospectuses carefully before investing. Past performance is notnecessarily indicative of future results. Investing involves risk, including possible loss of principal. To better understandthe similarities and differences between investments, including investment objectives, risks, fees and expenses, it isimportant to read the products' prospectuses. Shares of ETFs may be sold throughout the day on an exchange throughany brokerage account. However, shares may only be redeemed directly from an ETF by authorized participants, in verylarge creation/redemption units. Transactions in shares of ETFs will result in brokerage commissions and will generatetax consequences. ETFs are obliged to distribute portfolio gains to shareholders. Deutsche Bank may be an issuer,advisor, manager, distributor or administrator of, or provide other services to, an ETF included in this report, for which itreceives compensation. db X-trackers and Powershares DB funds are distributed by ALPS Distributors, Inc. The opinionsexpressed are those of the authors and do not necessarily reflect the views of DB, ALPS or their affiliates.

??Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

?2. Short-Term Trade Ideas?Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that areconsistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at theSOLAR link at http://gm.db.com.

?

http://www.dbxus.com/

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Additional Information?The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively"Deutsche Bank"). Though the information herein is believed to be reliable and has been obtained from public sourcesbelieved to be reliable, Deutsche Bank makes no representation as to its accuracy or completeness.

If you use the services of Deutsche Bank in connection with a purchase or sale of a security that is discussed in this report,or is included or discussed in another communication (oral or written) from a Deutsche Bank analyst, Deutsche Bank mayact as principal for its own account or as agent for another person.

Deutsche Bank may consider this report in deciding to trade as principal. It may also engage in transactions, for itsown account or with customers, in a manner inconsistent with the views taken in this research report. Others withinDeutsche Bank, including strategists, sales staff and other analysts, may take views that are inconsistent with those takenin this research report. Deutsche Bank issues a variety of research products, including fundamental analysis, equity-linkedanalysis, quantitative analysis and trade ideas. Recommendations contained in one type of communication may differfrom recommendations contained in others, whether as a result of differing time horizons, methodologies or otherwise.Deutsche Bank and/or its affiliates may also be holding debt or equity securities of the issuers it writes on. Analysts arepaid in part based on the profitability of Deutsche Bank AG and its affiliates, which includes investment banking revenues.

Opinions, estimates and projections constitute the current judgment of the author as of the date of this report. They donot necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank researchanalysts sometimes have shorter-term trade ideas that are consistent or inconsistent with Deutsche Bank's existing longerterm ratings. These trade ideas for equities can be found at the SOLAR link at http://gm.db.com. A SOLAR idea representsa high conviction belief by an analyst that a stock will outperform or underperform the market and/or sector delineatedover a time frame of no less than two weeks. In addition to SOLAR ideas, the analysts named in this report may havefrom time to time discussed with our clients, including Deutsche Bank salespersons and traders, or may discuss in thisreport or elsewhere, trading strategies or ideas that reference catalysts or events that may have a near-term or medium-term impact on the market price of the securities discussed in this report, which impact may be directionally counterto the analysts' current 12-month view of total return as described herein. Deutsche Bank has no obligation to update,modify or amend this report or to otherwise notify a recipient thereof if any opinion, forecast or estimate contained hereinchanges or subsequently becomes inaccurate. Coverage and the frequency of changes in market conditions and in bothgeneral and company specific economic prospects makes it difficult to update research at defined intervals. Updates areat the sole discretion of the coverage analyst concerned or of the Research Department Management and as such themajority of reports are published at irregular intervals. This report is provided for informational purposes only. It is not anoffer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy.Target prices are inherently imprecise and a product of the analyst’s judgment. The financial instruments discussed in thisreport may not be suitable for all investors and investors must make their own informed investment decisions. Prices andavailability of financial instruments are subject to change without notice and investment transactions can lead to lossesas a result of price fluctuations and other factors. If a financial instrument is denominated in a currency other than aninvestor's currency, a change in exchange rates may adversely affect the investment. Past performance is not necessarilyindicative of future results. Unless otherwise indicated, prices are current as of the end of the previous trading session,and are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank,subject companies, and in some cases, other parties.

The Deutsche Bank Research Department is independent of other business areas divisions of the Bank. Details regardingour organizational arrangements and information barriers we have to prevent and avoid conflicts of interest with respectto our research is available on our website under Disclaimer found on the Legal tab.??Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promiseto pay fixed or variable interest rates. For an investor who is long fixed rate instruments (thus receiving these cash flows),increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss.The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be theloss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse

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macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation(including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility(which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issuesrelated to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instrumentsto macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or tospecified interest rates – these are common in emerging markets. It is important to note that the index fixings may -- byconstruction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of theproper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed toa typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledgethat funding in a currency that differs from the currency in which coupons are denominated carries FX risk. Naturally,options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements.??Derivative transactions involve numerous risks including, among others, market, counterparty default and illiquidity risk.The appropriateness or otherwise of these products for use by investors is dependent on the investors' own circumstancesincluding their tax position, their regulatory environment and the nature of their other assets and liabilities, and as such,investors should take expert legal and financial advice before entering into any transaction similar to or inspired by thecontents of this publication. The risk of loss in futures trading and options, foreign or domestic, can be substantial. As aresult of the high degree of leverage obtainable in futures and options trading, losses may be incurred that are greaterthan the amount of funds initially deposited. Trading in options involves risk and is not suitable for all investors. Priorto buying or selling an option investors must review the "Characteristics and Risks of Standardized Options”, at http://www.optionsclearing.com/about/publications/character-risks.jsp. If you are unable to access the website please contactyour Deutsche Bank representative for a copy of this important document.?

Participants in foreign exchange transactions may incur risks arising from several factors, including the following: ( i)exchange rates can be volatile and are subject to large fluctuations; ( ii) the value of currencies may be affected bynumerous market factors, including world and national economic, political and regulatory events, events in equity anddebt markets and changes in interest rates; and (iii) currencies may be subject to devaluation or government imposedexchange controls which could affect the value of the currency. Investors in securities such as ADRs, whose values areaffected by the currency of an underlying security, effectively assume currency risk.?

Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in theinvestor's home jurisdiction.??United States: Approved and/or distributed by Deutsche Bank Securities Incorporated, a member of FINRA, NFA andSIPC. Analysts employed by non-US affiliates may not be associated persons of Deutsche Bank Securities Incorporatedand therefore not subject to FINRA regulations concerning communications with subject companies, public appearancesand securities held by analysts.

Germany: Approved and/or distributed by Deutsche Bank AG, a joint stock corporation with limited liability incorporatedin the Federal Republic of Germany with its principal office in Frankfurt am Main. Deutsche Bank AG is authorized underGerman Banking Law and is subject to supervision by the European Central Bank and by BaFin, Germany’s FederalFinancial Supervisory Authority.

United Kingdom: Approved and/or distributed by Deutsche Bank AG acting through its London Branch at WinchesterHouse, 1 Great Winchester Street, London EC2N 2DB. Deutsche Bank AG in the United Kingdom is authorised by thePrudential Regulation Authority and is subject to limited regulation by the Prudential Regulation Authority and FinancialConduct Authority. Details about the extent of our authorisation and regulation are available on request.??Hong Kong: Distributed by Deutsche Bank AG, Hong Kong Branch.??India: Prepared by Deutsche Equities India Pvt Ltd, which is registered by the Securities and Exchange Board of India (SEBI)as a stock broker. Research Analyst SEBI Registration Number is INH000001741. DEIPL may have received administrativewarnings from the SEBI for breaches of Indian regulations.

http://www.optionsclearing.com/about/publications/character-risks.jsp

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Japan: Approved and/or distributed by Deutsche Securities Inc.(DSI). Registration number - Registered as a financialinstruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type IIFinancial Instruments Firms Association and The Financial Futures Association of Japan. Commissions and risks involvedin stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying thetransaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a resultof share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming fromforeign exchange fluctuations. We may also charge commissions and fees for certain categories of investment advice,products and services. Recommended investment strategies, products and services carry the risk of losses to principaland other losses as a result of changes in market and/or economic trends, and/or fluctuations in market value. Beforedeciding on the purchase of financial products and/or services, customers should carefully read the relevant disclosures,prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are notregistered credit rating agencies in Japan unless Japan or "Nippon" is specifically designated in the name of the entity.Reports on Japanese listed companies not written by analysts of DSI are written by Deutsche Bank Group's analysts withthe coverage companies specified by DSI. Some of the foreign securities stated on this report are not disclosed accordingto the Financial Instruments and Exchange Law of Japan.

Korea: Distributed by Deutsche Securities Korea Co.?

South Africa: Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch RegisterNumber in South Africa: 1998/003298/10).??Singapore: by Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch (One RafflesQuay #18-00 South Tower Singapore 048583, +65 6423 8001), which may be contacted in respect of any matters arisingfrom, or in connection with, this report. Where this report is issued or promulgated in Singapore to a person who is not anaccredited investor, expert investor or institutional investor (as defined in the applicable Singapore laws and regulations),they accept legal responsibility to such person for its contents.

Taiwan: Information on securities/investments that trade in Taiwan is for your reference only. Readers shouldindependently evaluate investment risks and are solely responsible for their investment decisions. Deutsche Bank researchmay not be distributed to the Taiwan public media or quoted or used by the Taiwan public media without written consent.Information on securities/instruments that do not trade in Taiwan is for informational purposes only and is not to beconstrued as a recommendation to trade in such securities/instruments. Deutsche Securities Asia Limited, Taipei Branchmay not execute transactions for clients in these securities/instruments.??Qatar: Deutsche Bank AG in the Qatar Financial Centre (registered no. 00032) is regulated by the Qatar Financial CentreRegulatory Authority. Deutsche Bank AG - QFC Branch may only undertake the financial services activities that fall withinthe scope of its existing QFCRA license. Principal place of business in the QFC: Qatar Financial Centre, Tower, WestBay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related financialproducts or services are only available to Business Customers, as defined by the Qatar Financial Centre RegulatoryAuthority.

Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute,any appraisal or evaluation activity requiring a license in the Russian Federation.

?Kingdom of Saudi Arabia: Deutsche Securities Saudi Arabia LLC Company, (registered no. 07073-37) is regulated bythe Capital Market Authority. Deutsche Securities Saudi Arabia may only undertake the financial services activities thatfall within the scope of its existing CMA license. Principal place of business in Saudi Arabia: King Fahad Road, Al OlayaDistrict, P.O. Box 301809, Faisaliah Tower - 17th Floor, 11372 Riyadh, Saudi Arabia.??United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulatedby the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may only undertake the financial servicesactivities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai InternationalFinancial Centre, The Gate Village, Building 5, PO Box 504902, Dubai, U.A.E. This information has been distributed by

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Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as defined by theDubai Financial Services Authority.

Australia: Retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial productreferred to in this report and consider the PDS before making any decision about whether to acquire the product. Pleaserefer to Australian specific research disclosures and related information at https://australia.db.com/australia/content/research-information.html??Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaningof the Australian Corporations Act and New Zealand Financial Advisors Act respectively.?

Additional information relative to securities, other financial products or issuers discussed in this report is available uponrequest. This report may not be reproduced, distributed or published without Deutsche Bank's prior written consent.??Copyright © 2016 Deutsche Bank AG

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Equity Research

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Equity Research

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