The Facts and Fallacies of ETF Investing: Addressing ETF Liquidity & Volume

Broker/Advisor Use Only – Not For Use With the PublicBroker/Advisor Use Only – Not For Use With the Public

The Facts and Fallacies of ETF Investing:Addressing ETF Liquidity & Volume

Stan UelandETF Portfolio Manager

Broker/Advisor Use Only – Not For Use With the Public

TICKER SHARES PRICE MV of 1 CUAFFX 7,987 $6.34 $50,638ALXN 1,542 $47.99 $74,001AMGN 1,156 $54.33 $62,805AMLN 5,107 $12.24 $62,510BIIB 1,441 $44.16 $63,635CELG 1,257 $52.62 $66,143CEPH 1,304 $53.59 $69,881CRA 10,634 $6.20 $65,931GENZ 1,268 $51.70 $65,556GILD 1,536 $43.43 $66,708HGSI 3,552 $19.43 $69,015ILMN 1,626 $41.02 $66,699ITMN 4,919 $12.32 $60,602LIFE 1,458 $47.05 $68,599MIL 989 $69.42 $68,656MYGN 2,624 $25.06 $65,757NKTR 7,381 $8.57 $63,255OSIP 2,223 $32.00 $71,136SQNM 19,593 $3.28 $64,265VRTX 2,036 $32.11 $65,376

Total: $1,311,168Per share: $26.22

FT NYSE Arca Biotechnology Index Fund (FBT) Basket Shares

This example is for illustrative purposes and does not represent any actual investment or fund.

Broker/Advisor Use Only – Not For Use With the Public

This example is for illustrative purposes only.

The intraday NAV for an ETF is typically calculated and published by a third party under a separate symbol every 15 seconds throughout the trading day over the Consolidated Tape based on the current value of the securities specified for creation and redemption plus any estimated cash amounts associated with the creation unit, all on a per-ETF share basis. The intraday NAV is designed to give investors a sense of the relationship between a basket of securities that are representative of those held in the ETF’s portfolio and the share price of the ETF on an intraday basis.

Broker/Advisor Use Only – Not For Use With the Public

Liquidity of the underlying holdings is a significant factor in the liquidity of an ETF.

Liquidity of underlying: Shares trade $7.5b per day

$10m / $7.5b

= 0.13% of ADV

Liquidity of underlying: Shares trade $7.5b per day

$10m / $7.5b

= 0.13% of ADV

Buy $10m in FNX (First Trust Mid Cap AlphaDEX ETF)

Trader’s perspective:“Stock trades $467k per day”

$10m / $467k

= 2,140% of ADV

Trader’s perspective:“Stock trades $467k per day”

$10m / $467k

= 2,140% of ADV

This example is for illustrative purposes only. ADV statistics as of 1/7/2010.

For Broker/Advisor Use Only • Not For Use With The Public

Broker/Advisor Use Only – Not For Use With the Public

Broker/Advisor Use Only – Not For Use With the Public

Market MakerAP

ETF SponsorETF

This example is for illustrative purposes only.

Broker/Advisor Use Only – Not For Use With the Public

8,300 = Average Daily Volume

145,000 = Total Volume for the Day

92,800 = Size of a Single Trade

$4.6m (28%) = Growth in the Fund for the Day

Broker/Advisor Use Only – Not For Use With the Public

ETF Liquidity – Case in Point (FDM & BICK)

• 1.8m share trade (17k = 30 day ADV)• Microcaps• Smallest but most compelling

FDM First Trust Dow Jones Select MicroCap Index Fund

BICK First Trust BICK Index Fund

• 3.8m shares trade (21k = 30 day ADV)• $114m - growth in a single day

Broker/Advisor Use Only – Not For Use With the Public

Market MakerAP

ETF SponsorETF

This example is for illustrative purposes only.

Broker/Advisor Use Only – Not For Use With the Public

Traditional Mutual Fund Example

Broker/Advisor Use Only – Not For Use With the Public

ETF SponsorETF

Broker/Advisor Use Only – Not For Use With the Public

17.6

17.7

17.8

17.9

18

18.1

18.2

18.3

8:30 9:00 9:30 10:00 10:30 11:00

FXG-IV FXG trades

17.6

17.7

17.8

17.9

18

18.1

18.2

18.3

8:30 9:00 9:30 10:00 10:30 11:00

FXG-IV FXG trades

15

15.2

15.4

15.6

15.8

16

16.2

16.4

8:30 9:00 9:30 10:00 10:30 11:00

FXD-IV FXD trades

15

15.2

15.4

15.6

15.8

16

16.2

16.4

8:30 9:00 9:30 10:00 10:30 11:00

FXD-IV FXD tradesTicker: FXGMarket Cap 26,131,65330 day ADV 14,2818:30-11 Volume 110,385% of 30 day ADV 773%Trades at Bid 71,098Trades at Mid 15,380Trades at Ask 23,907Shares Redeemed 100,000

Ticker: FXGMarket Cap 26,131,65330 day ADV 14,2818:30-11 Volume 110,385% of 30 day ADV 773%Trades at Bid 71,098Trades at Mid 15,380Trades at Ask 23,907Shares Redeemed 100,000

Despite a meaningful selloff, both small and large ETFs trade up tight to their Indicative Value.

Ticker: FXDMarket Cap 150,330,070 30 day ADV 173,251 8:30-11 Volume 1,148,268 % of 30 day ADV 663%Trades at Bid 527,654Trades at Mid 358,425Trades at Ask 262,189Shares Redeemed 300,000

Ticker: FXDMarket Cap 150,330,070 30 day ADV 173,251 8:30-11 Volume 1,148,268 % of 30 day ADV 663%Trades at Bid 527,654Trades at Mid 358,425Trades at Ask 262,189Shares Redeemed 300,000

Broker/Advisor Use Only – Not For Use With the Public

FDD – 10/21/08— ½ fund— High Volatility

Returning clients

…

Broker/Advisor Use Only – Not For Use With the Public

Thoughts on Trading ETFs

Tips— Open/Close— Limits— iNAV— INTL funds— Stops Stop Limits Alerts— Implementation

Engage Us— Assistance— Access— Trading Desks

‘It’s an ETF’

This example is for illustrative purposes and does not represent any actual investment or fund

Example of Daily Fund Pricing