ETF Basics

ETF Basics: An Introduction Call 1-800-iShares to request a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal. Funds distributed by SEI Investments Distribution Co. (SEI) and advised by Barclays Global Fund Advisors (BGFA). BGFA is a subsidiary of Barclays Global Investors, N.A., not affiiated with SEI. ©2009 Barclays Global Investors. All rights reserved. iShares® is a registered trademark of Barclays Global Investors, N.A. iS-0334-0209 What has made iShares ETFs one of the fastest growing investment vehicles? Why have they posted 10 years of rising growth, in both bull and bear markets? How do they work? And how can you make them work for you? Well, you’re about to find out. INTRODUCTION ETF Basics: An Introduction Call 1-800-iShares to request a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal. Funds distributed by SEI Investments Distribution Co. (SEI) and advised by Barclays Global Fund Advisors (BGFA). BGFA is a subsidiary of Barclays Global Investors, N.A., not affiiated with SEI. ©2009 Barclays Global Investors. All rights reserved. iShares® is a registered trademark of Barclays Global Investors, N.A. iS-0334-0209 It’s the unique hybrid structure of Exchange Traded Funds that make them so innovative. See, they trade on an exchange like a stock but are structured like a traditional mutual fund. Just like a stock, ETFs trade on an exchange throughout the day. So you can apply stock trading strategies to ETFs—like placing a limit order, short selling, and (on some iShares ETFs) trading options. But at the same time, ETFs also offer many of the benefits of an index mutual fund- including benchmark tracking, low expense ratios, and low turnover. Buying and selling shares of iShares Funds will result in brokerage commissions. With short sales, you risk paying more for a security than you received from its sale. UNIQUE HYBRID STRUCTURE ETF Basics: An Introduction Call 1-800-iShares to request a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal. Funds distributed by SEI Investments Distribution Co. (SEI) and advised by Barclays Global Fund Advisors (BGFA). BGFA is a subsidiary of Barclays Global Investors, N.A., not affiiated with SEI. ©2009 Barclays Global Investors. All rights reserved. iShares® is a registered trademark of Barclays Global Investors, N.A. iS-0334-0209 ETFs feature a unique process for creating and redeeming shares. And this makes a whole host of benefits possible. Here’s how it works. The creation and redemption of ETF shares occurs between the fund and institutional broker dealers or market makers called Authorized Participants. These Authorized Partici- pants gather underlying securities that replicate the fund’s exact holdings and weights and then deliver them to the fund with a small amount of cash. The fund, in turn, provides ETF shares back to the authorized participants, who then release those ETF shares into the marketplace. This process works in reverse for redemptions, and it’s known as an in-kind transfer. It’s a tax-free exchange. And ETF fund managers don’t have to sell shares of the fund to raise cash in order to meet redemptions – a key part of why ETFs are so tax-efficient. Transactions in shares of the iShares Funds will generate tax consequences. CREATION AND REDEMPTION ETF Basics: An Introduction Call 1-800-iShares to request a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal. Funds distributed by SEI Investments Distribution Co. (SEI) and advised by Barclays Global Fund Advisors (BGFA). BGFA is a subsidiary of Barclays Global Investors, N.A., not affiiated with SEI. ©2009 Barclays Global Investors. All rights reserved. iShares® is a registered trademark of Barclays Global Investors, N.A. iS-0334-0209 Many investors think that you can determine the liquidity of iShares ETFs by simply observ- ing their trading volume. But a thinly traded iShares Fund is not necessarily a fund with low liquidity. In fact, iShares ETFs are as liquid as their underlying stocks or bonds. Why? Because when demand increases on the secondary market for an iShares Fund with low trading volume, Authorized Participants use the creation and redemption process to simply create additional shares and inject them into the market. That means that the liquidity of iShares ETFs is essentially unlimited. LIQUIDITY ETF Basics: An Introduction Call 1-800-iShares to request a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal. Funds distributed by SEI Investments Distribution Co. (SEI) and advised by Barclays Global Fund Advisors (BGFA). BGFA is a subsidiary of Barclays Global Investors, N.A., not affiiated with SEI. ©2009 Barclays Global Investors. All rights reserved. iShares® is a registered trademark of Barclays Global Investors, N.A. iS-0334-0209 One of the benefits that often attract investors to ETFs is their generally lower cost com- pared to traditional mutual funds. ETFs typically carry expense ratios that are well below those of both active and index mutual funds. For example, most iShares funds carry expense ratios from 9 to 75 basis points. That’s substantially lower than the average active mutual fund – which typically can carry expense ratios of over 100 basis points. And while ETF transactions will most likely generate brokerage commissions, their lower expenses can offset those transaction costs for long-term investors. Investment comparisons are for illustrative purposes only and not meant to be all-inclusive. There may be significant differences between the investments that are not discussed here. LOW EXPENSE RATIOS ETF Basics: An Introduction FPO Call 1-800-iShares to request a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal. Funds distributed by SEI Investments Distribution Co. (SEI) and advised by Barclays Global Fund Advisors (BGFA). BGFA is a subsidiary of Barclays Global Investors, N.A., not affiiated with SEI. ©2009 Barclays Global Investors. All rights reserved. iShares® is a registered trademark of Barclays Global Investors, N.A. iS-0334-0209 There are two reasons why iShares ETFs are tax efficient. First, because all iShares ETFs are designed to track market indices, they normally experi- ence less turnover than actively managed funds. This decreases the likelihood of taxes being incurred. Second, the unique hybrid nature of iShares ETFs protects shareholders from the actions of other shareholders. Buyers and sellers interact directly with one another on an exchange, not with the fund itself. This gives investors greater control when it comes to managing their exposure to capital gains—they’re taxed based on their own actions, not the actions of other shareholders. Mutual funds and iShares Funds are obliged to distribute portfolio grains to shareholders. Certain traditional mutual funds can be tax efficient as well. TAX EFFICIENCY ETF Basics: An Introduction Call 1-800-iShares to request a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal. Funds distributed by SEI Investments Distribution Co. (SEI) and advised by Barclays Global Fund Advisors (BGFA). BGFA is a subsidiary of Barclays Global Investors, N.A., not affiiated with SEI. ©2009 Barclays Global Investors. All rights reserved. iShares® is a registered trademark of Barclays Global Investors, N.A. iS-0334-0209 Because iShares ETFs are highly transparent, investors always know exactly what they own. That’s because holdings are published online and refreshed every 15 seconds. Most mutual funds only disclose the securities they’re holding once every three months. In addition, ETF fund pricing is available throughout the trading day. And the costs associ- ated with buying, selling, and owning iShares ETFs are explicit. And that includes commis- sions, bid/ask spreads and impact costs. iShares ETFs have nothing to hide. Which can give you the clarity you need to help keep your investment strategies on target. Due to MSCI license restrictions, holding for MSCI benchmarked funds are updated monthly. TRANSPARENCY ETF Basics: An Introduction Call 1-800-iShares to request a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal. Funds distributed by SEI Investments Distribution Co. (SEI) and advised by Barclays Global Fund Advisors (BGFA). BGFA is a subsidiary of Barclays Global Investors, N.A., not affiiated with SEI. ©2009 Barclays Global Investors. All rights reserved. iShares® is a registered trademark of Barclays Global Investors, N.A. iS-0334-0209 iShares ETFs track well-established benchmarks designed to represent specific segments of the market. So one thing investors never need to worry about is style drift. If you want, say, an allocation to small cap value and only small cap value, you can be sure that the appropriate iShares fund will closely track its corresponding small cap benchmark. And because index providers publish their construction methodologies, investors can always make informed choices about the indexes they want to track. TARGETED ASSET CLASS EXPOSURE ETF Basics: An Introduction Call 1-800-iShares to request a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal. Funds distributed by SEI Investments Distribution Co. (SEI) and advised by Barclays Global Fund Advisors (BGFA). BGFA is a subsidiary of Barclays Global Investors, N.A., not affiiated with SEI. ©2009 Barclays Global Investors. All rights reserved. iShares® is a registered trademark of Barclays Global Investors, N.A. iS-0334-0209 iShares ETFs are highly modular – with over 150 different funds to choose from, and even more on the way. This large, extended family of funds gives you the opportunity to build your portfolio around as many asset classes as you need: Domestic or international, value or growth, large-cap or small, whole sectors or specific industries. Even funds that specialize in fixed- income markets and alternatives. MODULAR INVESTING ETF Basics: An Introduction Call 1-800-iShares to request a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal. Funds distributed by SEI Investments Distribution Co. (SEI) and advised by Barclays Global Fund Advisors (BGFA). BGFA is a subsidiary of Barclays Global Investors, N.A., not affiiated with SEI. ©2009 Barclays Global Investors. All rights reserved. iShares® is a registered trademark of Barclays Global Investors, N.A. iS-0334-0209 The flexibility and breadth of the iShares family allows investors to utilize ETFs within a variety of common investment strategies. Short-term strategies such as cash equitization, where investors put idle cash to work in times of transition. Tactical strategies such as sector rotation, where investors express their views by over- weighting or underweighting sectors based on research. Or strategic applications of ETFs, such as the core/satellite strategy, which blends core index-based holdings with "satellite" allocations to actively managed securities or products. The information provided is not intended to be a complete analysis of every material fact respecting any strategy and has been presented for educational purposes only. INVESTMENT STRATEGIES ETF Basics: An Introduction Call 1-800-iShares to request a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal. Funds distributed by SEI Investments Distribution Co. (SEI) and advised by Barclays Global Fund Advisors (BGFA). BGFA is a subsidiary of Barclays Global Investors, N.A., not affiiated with SEI. ©2009 Barclays Global Investors. All rights reserved. iShares® is a registered trademark of Barclays Global Investors, N.A. iS-0334-0209 ETF Basics: An Introduction Call 1-800-iShares to request a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal. Funds distributed by SEI Investments Distribution Co. (SEI) and advised by Barclays Global Fund Advisors (BGFA). BGFA is a subsidiary of Barclays Global Investors, N.A., not affiiated with SEI. ©2009 Barclays Global Investors. All rights reserved. iShares® is a registered trademark of Barclays Global Investors, N.A. iS-0334-0209 CONCLUSION & 00_coverSheet 01_intro 02_hybridStructure 03_creationRedemption 04_Liquidity 05_Expense 06_taxEfficiency 07_transparency 08_classExposure 09_modularInvesting 10_investmentStrategies 11_toolsImplementation 12_conclusion