2012 Q3

2012 Q3

Partners

PROFESSIONAL & INSTITUTIONAL PORTFOLIOPIP REVIEWS

2012 Q3 PIP Reviews

IBPC 153 Fenchurch Street London EC3M 6BB

[email protected] Tel: +44 207 220 0440 Fax: +44 207 220 0445

Although every effort has been made to ensure the accuracy of the information contained in this book the publishers can accept no liability for inaccuracies that may appear.

All rights reserved. No part of this publication may be reproduced in any material form by any means whether graphic, electronic, mechanical or means including photocopying, or information storage and retrieval systems without the written permission of the publisher and where necessary any relevant other copyright owner. This publication in whole or in part may not be used to prepare or compile other directories or mailing lists, without written permission from the publisher. The use of cuttings taken from this directory in connection with the solicitation of insertions or advertisements in other publications is expressly prohibited. Measures have been adopted during the preparation of this publication which will assist the publisher to protect its copyright. Any unauthorised use of this data will result in immediate proceedings.

Copyright rests with the publishers, ibpc, England.

The material in this publication has been prepared solely for the distribution to professional and qualified investors.

The information in this publication you are about to read is intended for Professional and Qualified Investors. Including regulated financial intermediaries such as banks and securities brokers, regulated insurance companies, government or public authorities, corporate treasurers and financial advisers.

The information contained in this publication should not be considered as an offer, or solicitation, to deal in any of the investments or funds mentioned herein, by anyone in any jurisdiction in which such offer or solicitation would be unlawful or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation.

The market commentaries represent an assessment of the market environment at a specific point in time and are not intended to be a forecast of future events, or a guarantee of future results. This publication is not prepared for any particular investment objectives, financial situation or requirements of any specific investor and does not constitute a representation that any investment strategy is suitable or appropriate to an investors individual circumstances or otherwise constitute a personal recommendation. The information in this publication is being provided strictly for informational purposes only and does not constitute an advertisement.

The commentaries should not be regarded by investors as a substitute for independent financial advice or the exercise of their own judgment.

IBPC does not warrant the accuracy, adequacy or completeness of the information and materials contained in the publication and expressly disclaims liability for errors or omissions in such information and materials. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the reader, the investor, any person or group of persons acting on any information, opinion or estimate contained in the website. IBPC reserves the right to make changes and corrections to any information on this publication at any time, without notice.

Past performance is not a guide to the future. Market and exchange rate movements may cause the capital value of investments and the income from them, to go down as well as up and the investor may not get back the amount originally invested. Investments involve risks. Before making any investment decision, you should read the relevant offering documents and in particular the investment policies and the risk factors. You should ensure you fully understand the risks associ-ated with the investment and should also consider your own investment objective and risk tolerance level. Remember, you are responsible for your investment decision. If in doubt, please get independent financial professional advice.

PB2 2012 Q3 2012 Q3

01 Deborah Fuhr - ETFGI Global ETF and ETP Industry Insights, July 2012

4

02 Detlef Glow ETFs in EuropePleasure and Pressure 703 Deutsche Bank - The way to create commodity products

for Investors8

04 Lyxor Asset Management - Index 2.0 New innovation through Risk-Weighted Benchmarks

9

0506

ISIS Management AlphaDEX Fundamentally DifferentiShares - Trading Fixed Income ETFs

1214

07 BNP Paribas Indexing: Dont Miss the Trend! 16

Contents

PB3 2012 Q3 2012 Q3

Please find below a report that has been prepared for the press.We will shortly be offering an annual, paid-for subscription which will provide a more detailed monthly report, an ETF and ETP directory report and access to tools to find and compare ETFs and ETPs.

ETFGI Global ETF and ETP industry in-sights, July 2012Download the global report here

Summary for ETFs listed globallyAt the end of July 2012, the global ETF industry had 3,327 ETFs, with 7,477 list-ings, assets of US$1,541 Bn, from 172 providers on 50 exchanges.Assets

ETF assets have increased by 2.4% from US$1,505 Bn in June 2012 to US$1,541 Bn in July 2012.

YTD through end of July 2012, ETF assets have increased by 13.9% from US$1,353 Bn to US$1,541 Bn.

Flows In July 2012, ETFs saw net inflows of US$24 Bn. YTD through end of July 2012, ETFs saw net inflows of US$123 Bn.

SPDR ETFs gathered the largest net ETF inflows in July with US$5,941 Mn, followed by iShares with US$5,875 Mn and Vanguard with US$4,317 Mn net inflows.

Vanguard gathered the largest net ETF inflows YTD with US$34,254 Mn, followed by iShares with US$30,791 Mn and SPDR ETFs with US$16,048 Mn net inflows.

db x-trackers experienced the largest net ETF outflows in July with US$293 Mn, followed by Commerzbank with US$211 Mn and Daiwa Asset Management with US$154 Mn net outflows.

db x-trackers experienced the largest net ETF outflows YTD with US$1,742 Mn, followed by Commerzbank with US$1,086 Mn and EasyETF with US$775 Mn net outflows.

Summary for ETFs and ETPs listed globallyIncluding other Exchange Traded Products (ETPs), at the end of July 2012, the global ETF/ETP industry had 4,722 ETFs/ETPs, with 9,597 listings, assets of US$1,722 Bn, from 203 providers on 54 exchanges.

Assets ETF/ETP assets have increased by 2.3% from US$1,683 Bn in June 2012 to US$1,722 Bn in July 2012.

YTD through end of July 2012, ETF/ETP assets have increased by 12.9% from US$1,526 Bn to US$1,722 Bn.

Flows In July 2012, ETFs/ETPs saw net inflows of US$23 Bn. YTD through end of July 2012, ETFs/ETPs saw net inflows of US$131 Bn.

iShares gathered the largest net ETF/ETP inflows in July with US$6,008 Mn, followed by SPDR ETFs with US$4,556 Mn and Vanguard with US$4,317 Mn net inflows.

Vanguard gathered the largest net ETF/ETP inflows YTD with US$34,254 Mn, followed by iShares with US$31,463 Mn and SPDR ETFs with US$16,228 Mn net inflows.

Commerzbank experienced the largest net ETF/ETP outflows in July with US$211 Mn, followed by United States Commodity Funds with US$207 Mn and Daiwa Asset Management with US$154 Mn net outflows.

DB/x-trackers experienced the largest net ETF/ETP outflows YTD with US$1,686 Mn, followed by Commerzbank with US$1,086 Mn and EasyETF with US$775 Mn net outflows.

Summary for United States ETFs and ETPsAt the end of July 2012, the US ETF industry had 1,190 ETFs, assets of US$1,083 Bn, from 34 providers on 3 exchanges. Including other Exchange Traded Prod-ucts (ETPs), at the end of July 2012, the US ETF/ETP industry had 1,486 ETFs/ETPs, assets of US$1,209 Bn, from 52 providers on 3 exchanges.

Download the United States report here

Summary for European listed ETFs and ETPsAt the end of July 2012, the European ETF industry had 1,332 ETFs, with 4,782 listings, assets of US$284 Bn, from 39 providers on 21 exchanges. Including other Exchange Traded Products (ETPs), at the end of July 2012, the European ETF/ETP industry had 1,942 ETFs/ETPs, with 6,029 listings, assets of US$319 Bn, from 45 providers on 22 exchanges.

Download the European report here

Summary for Asia Pacific (ex-Japan) list-ed ETFs and ETPsAt the end of July 2012, the Asia Pacific (ex-Japan) ETF industry had 381 ETFs, with 496 listings, assets of US$68 Bn, from 86 providers on 14 exchanges. In-cluding other Exchange Traded Products (ETPs), at the end of July 2012, the Asia Pacific (ex-Japan) ETF/ETP industry had 400 ETFs/ETPs, with 518 listings, assets of US$69 Bn, from 88 providers on 14 exchanges.

Download the Asia Pacific (ex-Japan) report here

Summary for Canada listed ETFs and ETPsAt the end of July 2012, the Canadian ETF industry had 253 ETFs, with 335 list-ings, assets of US$50 Bn, from 7 providers on 1 exchange. Including other Ex-change Traded Products (ETPs), at the end of July 2012, the Canadian ETF/ETP

ETFGI

ETFGI Global ETF and ETP industry insights, July 2012

PB4 2012 Q3 2012 Q3

industry had 256 ETFs/ETPs, with 362 listings, assets of US$50 Bn, from 9 provid-ers on 1 exchange.

Download the Canada report here

Summary for Japan listed ETFs and ETPsAt the end of July 2012, the Japanese ETF industry had 96 ETFs, with 100 listings, assets of US$43 Bn, from 11 providers on 3 exchanges. Including other Exchange Traded Products (ETPs), at the end of July 2012, the Japanese ETF/ETP industry had 105 ETFs/ETPs, with 139 listings, assets of US$44 Bn, from 15 providers on 3 exchanges.

Download the Japan report here

Summary for Latin America listed ETFs and ETPsAt the end of July 2012, the Latin American ETF industry had 35 ETFs, with 533 listings, assets of US$10 Bn, from 16 providers on 4 exchanges. Including other Exchange Traded Products (ETPs), at the end of July 2012, the Latin American ETF/ETP industry had 35 ETFs/ETPs, with 562 listings, assets of US$10 Bn, from 19 providers on 4 exchanges.

Download the Latin America report here

For further information please contact:Deborah FuhrPartnerETFGI LLP100 Pall Mall, St JamesLondon, SW1Y 5NQUnited KingdomPhone: 44 207 321 5650Mobile: 44 777 5823 111Email: [email protected] ETFGI LLP is a limited liability partnership registered in England and Wales with registered number OC372221. Our registered office is at St Albans House, 57/59 Haymarket, 4th Floor, London, SW1Y 4QX.

ETFGI

ETFGI Global ETF and ETP industry insights, July 2012

PB5 2012 Q3 2012 Q3

Partners

By Detlef Glow, Head of Lipper EMEA Research at Thomson Reuters. The views expressed are by his own.

The exchange-traded fund (ETF) market has shown a high growth pattern since the inception of these products in Europe. Many different fund promoters have entered the scene. To diversify themselves from their competitors and to fulfill the needs of their customers, the fund promoters have been very innovative in their product offerings in terms of asset classes and replication techniques. This has led to a broad variety of ETFs competing for the assets of investors.

A highly concentrated marketEven though there are many types of funds offered to investors, in terms of as-sets under management the European ETF market is highly concentrated. The five top promoters account for more than 75% of the overall assets under man-agement of the ETF industry. On a fund-by-fund basis the concentration of the industry is even higher. The ten top funds by assets under management account for 25.68% of the overall assets under management, while the largest fund in the European ETF universe, iShares DAX (DE0005933931), accounts for 11.624 billion euros or 4.75% of the overall market.

The pleasure of being a billionaireA closer examination of the assets under management shows that only 47 of the 1,727 ETFs registered for sale in Europe hold assets above one billion euros. These funds account for 49.92% of the overall assets under management. Be-cause of the high assets under management the 47 billionaires are highly prof-itable for the fund promoters and can be called their bread and butter funds.

According to iShares, the worlds largest ETF provider, assets under management show a high correlation with turnover in an ETF. This means the largest funds in the markets also tend to have the highest turnover, making these products at-tractive to institutional investors, who can buy and sell large amounts of these products without making a significant market impact. In addition, institutional investors such as funds of funds are, under the UCITS regime, not allowed to hold a major stake in any given fund in their portfolios, making a fund with high assets under management even more attractive to them. In other words, in an industry where size is one of the key factors successful products becomes even more successful as size in assets under management and liquidity attracts even more new money.

Whats on with the other funds?Since only a few funds account for the majority of assets under management in the ETF industry, there must be a lot of funds with low assets under manage-ment. With regard to the actively managed funds, where funds can get merged or liquidated if they dont gather a certain amount of money over time, this raises the question: are these funds now more subject to possible consolidation within the ETF segment?

The pressure of low assets under managementOpposite to the billionaires, the poor funds holding low assets under manage-ment have to deal with a lot of pressure. All funds in the product range of a fund promoter cost money for the management and general maintenance of the funds, i.e., there are costs for accounting and legal consultation as well as for marketing and listing. Since these costs exist anyway, some of the funds are not profitable for the promoter and need subsidies from other parts of the business. As long as the industry is enjoying healthy growth, where the overall assets un-der management of a promoter are rising on a steady basis, this seems to be no problem. But in an unstable environment that comes with decreasing earnings and an increasing number of regulations fund promoters need to review their product ranges to reduce the overall complexity and to maintain their earnings.

Fund promoters may make the decision to liquidate funds that are not contrib-uting to earnings.

Before analyzing the ETF market from this point of view, one needs to look at the different kinds of costs and the income streams related to ETFs.

Different kinds of fees and expensesThe expenses of managing the portfolio of an ETF depend on different factors and can be split into fixed and variable costs. The fixed costs are in general the costs for the listings on the different exchanges, fees for accounting, as well as fees for legal and compliance. The variable charges, such as costs for the index license or custodian fees, are based on the assets under management. The vari-able costs follow different patterns:

First of all there is the cost for the index license, which follows the rule of exclu-sivity, i.e., the lower the number of licenses for an index, the higher the costs are for these licenses. The second cost type is the cost for the management of the ETF. These costs follow the rule of complexity, i.e., the more complex the underlying index of an ETF, the higher the costs are for maintaining the fund. The underlying index is also the driver of fees and expenses that need to be paid to buy the individual securities within the index, meaning the underlying index also has an impact on the spreads of an ETF.

Various streams of incomeOn the other side, one needs to look at the different streams of income that come from offering an ETF. The first thing that comes to mind is the manage-ment fee, which is dependent on the assets under management. Secondly, there might also be some income from securities lending, which the fund has to share with its investors, i.e., the investors shall get all income after fees and expenses related to the securities lending process. In addition, the fund and/or its parent organization can receive income from the so-called creation and redemption feespaid by the authorized participants for the creation and redemption of shares. These fees depend on the trading activity within an ETF; a fund with low assets under management might be very profitable for the promoter if there is a lot of intraday trading activity within the shares of the fund (as there is for inverse, short, and leveraged strategies because of their revaluation process at the end of any given trading day or calculation cycle). Another stream of income for the parent of the promoter could be generated from the fees for the use of derivatives such as SWAPs when they are issued by a counterparty that belongs to the same parent organization.

The ETF death listWith regard to the different costs and the various streams of income, the level of assets under management a fund needs to gather to be profitable varies from fund to fund. But I learned from my discussions with industry participants that a fund seems to become profitable when the assets under management are above one hundred million euros. This level means the fund promoter has a solid stream of income from the management fee and may in addition be able to receive income from trading in the fund as well as from securities lending.

To estimate what may happen to funds that are not able to hit their target, look-ing at the active fund management industry might be helpful. It is common sense in the active fund management industry that a fund that seems to not be successful, i.e., does not gather enough assets under management from the promoters perspective, will be liquidated or merged to bring down overall costs and the complexity of the product range. In some cases even profitable funds will be merged with similar funds to reduce the overall number of funds and therefore the complexity of the product range.

From my point of view an ETF that has not been able to gather at least one hun-dred million euros over a three-year period is in danger of closure. A detailed view of the European ETF industry shows there are 294 of the 1,727 funds as of June 30, 2012, that have never held assets of more than one hundred million

Detlef Glow

ETFs in EuropePleasure and Pressure

PB6 2012 Q3 2012 Q3

euros over the last three years. This means that around one out of six funds are in danger of closure. Even though this already sounds tough for the industry, the number of funds with assets under management below 100 million euros dramatically increases if we do not limit the examination to funds that are older than three years.

SummaryTaking all the different types of expenses and possible income streams into ac-count, the assets under management of an ETF are not a fully valid measure to estimate the profitability of an ETF. But it can be taken as granted that funds that hold a large amount of assets under management are more unlikely to be closed than funds that do not generate any revenue for the fund promoter. Small funds that are not able to attract enough investors to reach their target in terms of as-sets under management are likely to be closed. This can be seen in the product range of ETF Securities, which liquidated nine of its funds in June because they didnt meet the target in terms of assets under management and the expected turnover volume.

That said, in a number of cases the fund promoter will keep an ETF in its product range even if it is not profitable, since some products are needed to complete the product offering of the promoter. Especially for the large players in the ETF market, it is important to have an almost-complete product range offering, since investors expect them to be a one-stop shop.

Even though we are in a tough market environment in which some promoters have started to review product ranges, there is no foreseeable general trend at the moment toward consolidation in the ETF industry. A closer view of the over-all picture shows an opposite picture: index providers have started new initia-tives toward more active indices, i.e., indices that optimize their risk-return pro-file, to enhance their product ranges. These new index offerings might lead to even more new products competing for the money of investors. But, since there is no broad acceptance for new strategy indices by investors at the moment, ETFs tracking these are still niche products.

All in all, despite the fund closures we are seeing over the short term, from my point of view the ETF industry will grow further in all areas, not just in terms of assets under management. We will see more ETFs that track an even broader range of indices coming to the market in the future. This behavior is rational, since product innovation and investor demand are the growth drivers of the industry. Nobody can know what will be the next strategy index to become a mega seller, so index providers and ETF promoters need to continue to be cre-ative.

Detlef Glow

ETFs in EuropePleasure and Pressure

Detlef Glow

Head of Lipper EMEA Research at Thomson [email protected]

PB7 2012 Q3 2012 Q3

IntroductionStarting in 2007, the European market experienced the proliferation of a new ex-change traded product (ETP) asset class: Commodities. The first products made their appearance in the European market in 2004/5 and were launched by ETF Securities and BNP Paribas.However, it took a few years for investors to warm up to this concept and it wasnt until 2007 that the number of such products began reaching a critical mass.

European investors have long grappled with the best means to achieve exposure to commodity returns. Direct exposure to a specific commodity return profile has not been readily attainable historically. Storage capacity and costs, season-ality, uniqueness of production batches, perishability, and difficulty to transport are just a few of the reasons that make direct investment in commodities both unpractical and expensive. Historically, investors have primarily used derivatives (more commonly futures) and purchased shares in companies that operate in the commodities sector in order to achieve their desired investment objectives. Trading futures and other derivatives requires additional expertise and constantinvestment supervision to ensure, for example, continuous rolls. Holding shares in commodity companies often generates imperfect results in addition to being costly and requiring scale and additional expertise. C-ETPs made gaining direct investment exposure in a diverse set of commodity return profiles more practi-cal and cost effective.

The creation of C-ETPs was propelled by two forces that, together, fused to build the momentum for the creation of these products. The first brewed with rap-idly growing assets and increasing popularity of exchange- traded equity funds. The second push came from investors and investment managers looking for opportunities to enhance return diversification in their portfolios. These forces culminated circa 2007, and with the credit crisis in full swing, providers sought to create products that utilized the, now, popular characteristics of exchange- traded funds and also afforded more widely reachable exposure to uncorrelated (to equity and fixed income) return streams: commodities.

In order to facilitate creation of commodity ETPs, providers in Europe have uti-lized a variety of financial instruments as building blocks (mainly futures, total return swaps, direct investment in underlying commodities) and have worked with what existing regulatory framework parameters permit. In Europe, the Un-dertakings for Collective Investment in Transferable Securities (more commonly known as UCITS III) regime, governs the rules for creating and passporting funds throughout the European Union. However, in its current incarnation, III, UCITS only permits the creation of funds that provide exposure to broad commodity indices.

While UCITS III facilitated the creation of a number of C-ETPs tracking broad commodity indices, providers went back to the drawing board to find an avenue which would enable the creation of products that could track a wider variety of commodity narrow benchmark returns and that could be easily registered for sale across-the European Union. The European Prospectus Directive (EUPD) provided the platform which ETP providers utilized to structure and passport exchange -traded debt instruments that could offer direct exposure to a widevariety of specific commodity return profiles.Debt issuing C-ETPs in the European Union are issued in two forms: as exchange- traded commodities (ETCs) and exchange- traded notes (ETNs). While there are a number of structural and legal differences between ETCs and ETNs, perhaps the most important is that for ETCs, notes/certificates are issued by a special pur-pose vehicle whose sole purpose is to generate the vehicles return profile. The market risk and return profile of the ETC issued notes/certificates is (more often) dependent on a total return swap with a counterparty in an over-the-counter (OTC) derivative transaction. On the other hand, the value and return profile of an ETN is dependent on the credit worthiness of its issuer, most commonly an established financial services institution. In order to reduce counterparty risk, virtually all ETCs are collateralized though the degree, form and mechanics of collateralization can differ greatly from one ETC to the next. ETNs are not always collateralized as they are issued by highly rated financial institutions.

Commodity futures pricing fundamentals

In simple terms, the future price of a commodity is composed of todays (spot) price plus the cost of storing it and transporting it to its point of sale. This is a simplistic way of looking at what determines the future value of an asset. In reality, depending on each commodity a number of additional factors are also relevant, such as perishability, pricing and availability of substitutes, supply and demand chain factors etc. For the purposes of explaining future pricing funda-mental concepts however, we have assumed that storage and transportation arethe only costs.

A spot or future return could be funded or unfunded, depending on the as-sumption made about the source of the funds used to make the investment. The assumption behind an unfunded return is that the funds have been borrowed to make this investment, and thus the cost of borrowing needs to be deducted from the return. The assumption behind a funded return is that the funds are held in cash and therefore the cash return needs to be added to the return.

Equation 1: Spot funded return = Spot return of security (cash is used to pur-chase the security)

Equation 2: Spot unfunded return = Spot return-Cost of funding (cost of bor-rowing)As discussed earlier, for most commodities, the concept of spot return is not at-tainable and therefore these equations need to be adjusted to account for the futures valuation.

Equation 3: Future asset price= Spot price+Storage costs+Transportation costsSimilarly, the futures position could be funded or unfunded and thus the cost of borrowing needs to be deducted (unfunded) and the cash return added (fund-ed), as appropriate. In addition to the costs associated with funding and main-taining a commodity to a future date, an additional element needs to be con-sidered: the roll impact. As futures contracts are exchange- traded instruments, their expiration cycles are standardized and most tend to be monthly, quarterly or annual. A C-ETP will need to obtain continuous exposure to its commodity return benchmark, and thus the impact of rolling one futures contract into an-other needs to be accounted when estimating a C-ETPs benchmark return.

Equation 4: C-ETP Return = (Spot return+/- roll impact) + Funding return= Futures Return+Funding Return Note that as C-ETPs employ synthetic means of creating their target benchmarks return, there will not be a direct investment of the ETP in futures. However, since the benchmarks constituents are futures the roll impact needs to be accounted for. Synthetic replication is facilitated most commonly by a total return swap, the total return payable by the TRS coun-terparty to the C-ETP will account for the roll impact.Certain indices will attempt to minimize the roll cost by deploying what is known as optimum yield roll methodology. This ensures that the index futures rebal-ance is done dynamically in an attempt to select an optimal future expiration. This aims to maximize potential roll returns or minimize or minimize potential roll costs. This dynamic roll approach may also result sometimes in rolling into contracts of a different term than the current, depending on what will offer the optimum roll yield.

Shape of the futures curve: Backwardation and Contango

While logic dictates that the spot price of a commodity will be lower than its future price, due primarily to costs (such as storage) that need to be incurred to take the commodity to a future date, this is not always the case. When the spot price is lower than the futures price, the cost of carry is negative; the futures curve is described as being in Contango, a state more applicable to non perish-able commodities. If the spot price is higher than the future price, the cost of carry is positive, the curve is described as being in backwardation, a state driven

Deutsche Bank

The way to create commodity products for investors

PB8 2012 Q3 2012 Q3

by market fundamentals and more applicable to perishable commodities.In theory, as a future contract approaches its expiration date, spot and future prices will typically converge. This will not always be the case though when it comes to commodities.Uneven marginal production costs and supply and demand factors cause fu-tures curves to invert thus often resulting in losses, translating into roll costs when rolling from one contract to the next.Both the roll costs as well as the financing costs (especially when benchmark re-turn calculation assumes reinvestment of gains) can end up having a very signifi-cant impact on a commodity investors return. While the funding return remainsrelatively small, the roll return impact on many occasions eclipses the spot price return. This is absolutely crucial to observe and understand as the benchmark constituents of the vast majority of C-ETPs are futures and that makes the C-ETPs returns subject to the roll effect. The roll effect is not C-ETP specific, it is a direct result of how futures contracts work and impacted by variability in the pricing of different commodity production batches.This fact can often lead to confusion as the media/news channels will often de-scribe change in spot prices rather than what can actually be achieved. For ex-ample, the spot change in crude oil in 2009 was 78% but an investor in crude oil would have potentially earned 17% due to the futures roll costs.This article is based on the report The Race for Assets in the European Commod-ity Exchange- Traded Products market by Christos Costandinides, Deutsche Bank ETF Research.

Deutsche Bank

The way to create commodity products for investors

Philip Knppel

Sales ETF & ETC

Since graduating from the University of Constance with a degree in economics in 2005, Philip Knueppel has worked in the area of structuring for derivatives-based investment products. He is currently responsible for product management and sales at Deutsche Banks exchange-traded funds (ETFs) and exchange traded commodities (ETCs) platforms in Frankfurt, where he has worked since 2010. Prior to working for Deutsche Bank, Philip was a product manager on the struc-tured products desk at ABN Amro in Zurich and Frankfurt.

PB9 2012 Q3 2012 Q3

Capitalization-weighted indexation is the most common way to gain access to broad equity market performance. It is often backed by results of modern port-folio theory: in the CAPM framework, the optimal investment strategy is to hold the market portfolio, which corresponds to the capitalization-weighted portfo-lio under some assumptions. Because of this presumed efficiency, capitalization-weighted indexes play a central role in the investment industry. First, they are a convenient investment solution. Second, they represent a benchmark for active management.

However, many empirical studies have shown that capitalization-weighted in-dexation is not generally the optimal portfolio. One explained that the CAPM hy-potheses do not necessarily hold. For example, investors do not have the same expectations, elasticity of demand and supply is not infinite, trading costs are not zero, etc. However, the main argument remains the fact that expected re-turns (or risk premiums) are very difficult to forecast. Other criticism has recently been made about capitalization-weighted indexes:

By construction, a capitalized weighted (CW) index is a trend following strategy; it incorporates a momentum bias, which leads to bubble exposure risk as weights of the best performers increase and weights of the worst performers decrease;

A CW index generally contains a growth bias, because high valuation leads to greater weight than low valuation with equivalent realized earnings;

A CW index generally suffers from the lack of risk diversification (it may be concentrated in a few stocks) and high drawdown risk.

In this context, alternative-weighted indexation has recently prompted great interest from both academic researchers and market professionals. An alterna-tive weighted index is defined as an index in which assets are weighted in a different way than those based on market capitalization. Alternative-weighted indexation can be split in two families: fundamental indexation and risk-based indexation. Fundamental indexation defines the weights as a function of eco-nomic metrics like dividends or earnings whereas risk-based indexation defines the weights as a function of individual and common risks.

Two well-known examples are the minimum-variance (MV) portfolio and the equally-weighted (1/n) portfolio. The first one is the portfolio located on the mean-variance efficient frontier presenting the lowest risk. The second one is simply constructed by attributing the same weight to all of the components of the portfolio. Recently, academic and professional researchers have proposed two other risk-based indexation methods.

The most diversified portfolio (MDP) is based on the optimization of a diversifi-cation measure. It is also known as the maximum Sharpe ratio (MSR) portfolio, because it is the optimal portfolio if all of the assets have the same Sharpe ratio. In the equally-weighted risk-contribution (ERC) portfolio, the weights are com-puted in such a way that every asset in the portfolio has the same risk contribu-tion.

These four methods present some interesting mathematical and statistical properties. In particular, they coincide in some limiting cases. Using an empiri-cal application with the DJ Euro Stoxx 50 universe over the period 1992-2009, we obtain some appealing results in terms of performance, volatility, draw downs, diversification, etc. Our study also shows that restrictive constraints on weights should be imposed in the MV or MDP/MSR methods to avoid concen-tration in some assets. Indeed, it appears that these two methods take bigger bets on some portfolio components unlike the ERC and 1/n methods. Another important issue of alternative-weighted indexation is the question of transac-tion costs. To control them, an estimated covariance matrix with a long historical period must be used. For the MV and MDP/MSR methods, it is important to add some constraints to limit concentration and market price impact.

Disclaimer

This is a commercial and not a regulatory document. Provisions contained in this document are provided for information pur-

pose only and has no contractual value. The Lyxor ETF presented herein are UCITS III open-ended funds and have been autho-

rized by the Autorit des Marchs Financiers. Each Lyxor ETF has a prospectus available on simple demand sent to Lyxor Asset

Management (contact details are mentioned below) or on www.LyxorETF.com

The investment in the Lyxor ETFs may be subject to restrictions with regard to certain persons or in certain countries under

national regulations applicable to such persons or in said countries. It is the investors responsibility to ascertain that they are

authorized to invest into these products. By investing into these products, the investor certifies to Lyxor that he is duly authorized

to do so. Investors are advised to consult the Risk Factors heading in the prospectus. Any investment in a Lyxor ETF involves

certain risks; the main ones are as follows:Market risk and risk of capital loss associated. In particular investors may experience

substantial or sudden loss, including, in the worst case scenario, the loss of the investors entire investment; Counterparty risk.

Non achievement of the Funds objectives: The Fund may not always be able to replicate exactly the performance of the index

(or indices).

This document does not purport to summarize or contain all of the provisions that would be set forth in the relevant prospec-

tuses. Any purchase or sale of any Lyxor ETF may be made only pursuant to final relevant prospectuses. This document does not

consider specific investment objectives, financial situations or the particular needs of any specific entity or person and may not

be relied upon as investment, legal, accounting or tax advice regarding the appropriateness of investing in any Lyxor ETF or par-

ticipating in any investment strategy stated herein. Any decision to invest in a Lyxor ETF should be made only after reading the

relevant prospectus for that ETF, conducting such investigations as the prospective investor deems necessary after consulting

with the prospective investors own independent investment, legal, accounting and tax advisors in order to make an informed

determination of the suitability and consequences of an investment in such product.

The figures relating to past performances refer to past periods and are not a reliable indicator of future results. Information

presented in this document is based in pertinent part on market data collected at a given moment and such information is sub-

ject to modification and may change from time to time. Certain information presented herein has been obtained from sources

believed by Lyxor AM, or Socit Gnrale (SG) to be reliable. However, Lyxor AM or SG has not verified the accuracy of such

information and Lyxor AM makes no representation or warranty, express or implied, as to the fairness, accuracy, completeness or

correctness of such information, nor does Lyxor AM accept any liability arising from its use (nor for any material or typographic

error that may appear in this document). Any opinions expressed herein are statements of our judgment on this date and are

subject to change without notice.

The EURO iSTOXX 50 Equal Risk index and the trademarks used in the index name are the intellectual property of STOXX Limited,

Zurich, Switzerland and/or its licensors. The index is used under license from STOXX. The securities based on the index are in no

way sponsored, endorsed, sold or promoted by STOXX and/or its licensors and neither STOXX nor its licensors shall have any

liability with respect thereto.

The MSCI indexes are the exclusive property of Morgan Stanley Capital International Inc. (MSCI). MSCI and the MSCI Indexes are

service mark(s) of MSCI or its affiliates and have been licensed for use for certain purposes by Lyxor. Any funds referred to herein

have not been passed on by MSCI, any of its affiliates or any other party involved in, or related to, making or compiling any MSCI

index as to their legality or suitability, and are not issued, sponsored, endorsed, sold, managed or promoted by MSCI, any of its

affiliates or any other party involved in, or related to, making or compiling any MSCI index, none of which makes any warranties

or bears any liability with respect to any funds referred to herein. The Prospectus contains a more detailed description of the

limited relationship MSCI has with Lyxor and any related funds.

The indices sponsor does not under any circumstances provide any guarantee, whether explicitly or implicitly, as to the data

linked to the index, as well as to its quality, accuracy and/or completeness, or concerning the financial rating of any issuing entity

and has no responsibility resulting from the use of the index and/or its composition. The indices sponsor cannot be held liable

for p p any reason whatsoever in terms of an error in the indices, and the indices sponsor is not required to inform of such an

error, in the event it would occur.

Lyxor

Index 2.0 New innovation through Risk-Weighted Benchmarks

Lyxor has launched 2 new ETFs on risk based indices:

PB10 2012 Q3 2012 Q3

First Trust Portfolios L.P. First Trust Advisors L.P.www.ftportfolios.com

Traditional indexingOriginally, indexes were designed to measure the average performance of a group of stocks that were considered representative of either the broad mar-ket or a specific segment of the market. Indexes were also developed to serve as benchmarks that investors could use to gauge the performance of an active portfolio manager. Because indexes are intended to mirror the market, the vast majority weight stocks based on their market capitalization. Later, mutual funds and exchange-traded funds (ETFs) were introduced which were designed to track the performance of these traditional indexes. These funds invest in the same group of securities, or a sampling of the securities, that compose the in-dex.1

The problem with cap-weighted indexesThe market is extremely efficient at reflecting the prices investors are currently willing to pay for a company based on available information. However, the mar-ket is not immune to speculation and changes in investor sentiment which can cause a companys price to deviate significantly from its fundamental value. This scenario became clearly evident during the internet and technology-driven bull market that took place in the late 1990s and the subsequent bursting of the bubble in 2000. This period of market speculation also exposed a potential flaw inherent in capitalization-weighted indexes. Cap-weighted indexes, by their very nature, were forced to overweight larger, potentially overvalued companies and underweight smaller, potentially undervalued companies causing a drag on an indexs returns.

Fundamentals still matterBecause stock prices are subject to factors that can make them deviate from a companys true value, fundamental indexing has been gaining favor with inves-tors. Unlike traditional cap-weighted indexes which rely solely on the price that the market places on a company to determine its weight in an index, fundamen-tally-weighted indexes employ fundamental measures of evaluating a company such as price to book value, price to cash flow, price to sales and return on assets to determine how much weight it should represent within an index.

Fundamental weighting attempts to limit exposure to over-priced stocks and in-crease exposure to those which are trading at more attractive valuations. While different methods of indexing will have inherent limitations at different times, we believe that fundamental indexes have the potential to generate higher long-term returns, and often times reduce volatility, compared to similar cap-weighted indexes.

What is Alpha?Alpha is a measure of the portion of a return arising from non-market risk. In other words, alpha is an indication of how much an investment outperforms or underperforms relative to its benchmark. For example, if an investment returns more than what youd expect given the market for the asset class it is invested in, it has a positive alpha. Conversely, if an investment returns less than the asset class, it has a negative alpha. Because of the additional benefits provided by ETFs such as tax efficiency, exchange-traded liquidity, and transparency, we believe ETFs may be a better alternative to active management when seeking alpha.

AlphaDEX Enhanced Index ETFsThe indexes which provide the basis for the AlphaDEX funds start with a broad-based index and are enhanced through the use of the methodology shown in the chart.

Because indexing has historically implied broad market matching returns through passive investing, investors have commonly turned to active manage-ment when seeking market outperformance. We believe that the passive invest-ing structure provided by indexing can be used as an effective way to generate positive alpha.

The goal of an enhanced index is to identify those stocks from within a tradition-al broad-based index which exhibit the fundamental characteristics that enable them to provide the greatest potential for capital appreciation.

The enhanced indexing approach seeks to generate positive alpha relative to the broad-based passive index from which it selects its stocks. Enhanced index-ing is itself inherently passive. No active judgement is made when evaluating stocks and every step in the process is driven by a transparent, repeatable quan-titative process.

ISIS Management

AlphaDEX Fundamentally Different

Index representation

Weighting method

Performance objective

Traditional index

Own all stocks

Size

Beta

Enhanced index

Own a select group

Fundamentals

Alpha

1Indexes are unmanaged and an investor cannot invest directly in an index. Unmanaged index returns do

not reflect any fees, expenses, or sales charges. Past performance is not a guarantee of future results. Index

performance is not representative of any AlphaDEX fund.

PB11 2012 Q3 2012 Q3

The AlphaDEX family of ETFsThe First Trust AlphaDEX exchange-traded funds are designed to track the performance of a group of custom enhanced indexes which employ the pro-prietary, rules-based AlphaDEX fundamental stock selection methodology. The AlphaDEX family of funds consists of a diverse range of sector, style, multi cap, and international funds.

ISIS Management

AlphaDEX Fundamentally Different

Martin MOLERE

First Trust Global PortfoliosTel: +44 (0)203 440 [email protected]

PB12 2012 Q3 2012 Q3

APs can use an internet-based matching platform for iShares funds to advertise buy and sell interest anonymously and execute with other counterparties. Cross-ing transactions in this manner reduces the need to create and redeem in the primary market. The iShares Capital markets team has access to this platform, enabling them to match client interests with appropriate brokers with a natural axe often resulting in more competitive pricing.

Secondary Market TradingThe secondary market encompasses trading between the market-maker/broker and the investor, both on-exchange and OTC. A number of market-makers quote bid and offer prices for FI ETFs during the trading day. In Europe, iShares FI ETFs are cross-listed on six primary exchanges. These are: London Stock Exchange (LSE), NYSE Euronext Paris, NYSE Euronext Amsterdam, Xetrra (deutsche Brse), Borsa Italiana and SIX Swiss Exchange.

Pricing of Fixed Income ETFsThe price of a FI ETF is driven by four main factors:

``the value of the underlying securities

``the level of supply and demand in the secondary market

``the cost of share creation through the underlying FI markets

``the level of FI market volatility

Due to the OTC nature of the bond market, transparency of underlying bond prices within an ETF is limited. iShares publishes the bond holdings of a FI ETF, with maturity, coupon and weight on a daily basis, enabling the market-makers to price the fund. The NAVs calculation of the fund uses either bid or mid prices. While NAV is provided at the end of each trading day, various sources (including deutsche Brse) also publish indicative Net Asset Value (iNAV) during European trading hours. iNAV can be often seen as a good estimate for the fair value of a FI ETF.Usually it is the bid/offer spread of the underlying bonds that drives the spread of a FI ETF. The FI ETF spread and the brokerage commission are the main con-stituents of the cost of a trade. If there is strong demand for a FI ETF in the sec-ondary market, its price can rise above its fair value (i.e. NAV plus or minus the cost of creating/redeeming units). A similar process applies when there is strong selling of a FI ETF, resulting in its units trading at a discount to its fair value. If the price of a FI ETF moves sufficiently far outside the bid/offer band of the underly-ing basket of securities, then an arbitrage opportunity exists.

A FI ETF can trade at a premium or discount to its fair value and this can continue

FOR PROFESSIONAL INVESTORS ONLY AND FOR PROFESSIONAL INVESTORS ON A REVERSE SOLICITATION

BASIS ONLY IN JERSEY

Executive SummaryFixed Income Exchange Traded Funds (FI ETFs) are an efficient way for investors to gain exposure to bond markets. There are two markets associated with FI ETF trading: the primary (or underlying market) and the secondary market.

In the primary market, securities in the proportion of the existing holdings of the fund are bought or sold, often on the back of creation or redemption or-ders from Authorised Participants (APs). This process operates in conjunction with the secondary market, which includes on-exchange and Over-The-Counter (OTC) transactions.Underlying bond prices are used to calculate a funds Net Asset Value (NAV) and evaluate its bid/offer spread. In the primary market there are a variety of types of trades: in-kind, cash and NAV plus. The nature of a trade will normally determine which market, primary or secondary, is the most suitable market for a particu-lar trade. As trading on both markets is often the most appropriate solution for trade execution, it is important to place FI ETF orders with market-makers that regularly trade in these funds in order to achieve best price execution. With ac-cess to more than 40 APs and 100 market-makers/brokers, iShares has expert knowledge on where to source liquidity, be it on-exchange or OTC.

iShares Capital Markets TeamThe iShares Capital markets team is a dedicated markets desk that focuses on ensuring the best liquidity for the iShares FI product range. The team leverages the trading expertise of Blackrock, in order to help clients navigate the ETP land-scape effectively, and is uniquely positioned to help clients trade cost efficiently by partnering with broker-dealers and trading venues across EmEA to identif y the sources of liquidity and trading data. This places them in a good position to match trading interests with those with natural axes, reducing the cost of trad-ing for our clients.

Primary Market TradingIn the primary market, APs, who are typically large institutional intermediaries, can create and redeem FI ETF units directly from an ETF provider, such as iS-hares. In the case of physically replicating FI ETFs, trading on the primary market is done in blocks of FI ETF shares. There are different types of primary market trades available depending on the FI ETFs: in-kind, cash and NAV plus. In-kind creation trades are trades where units are exchanged with baskets of the un-derlying securities of the same type and proportion held within the FI ETF. For cash creations, the market-maker pays a cash amount to the FI ETF provider, (e.g. iShares), who then purchases the underlying securities within the fund. Similarly, for NAV plus creations, the AP pays the NAV equivalent in cash plus the spread to the FI ETF provider. In this trade, the spread is pre-set taking into consideration underlying bond prices and market conditions. It is published on a daily basis and distributed directly to market-makers pricing the FI ETF. Importantly, the FI ETF provider also publishes a threshold amount up to which the market-maker can create or redeem shares at this fixed spread. Should a market-maker wish to trade above this threshold, the order is executed at cost.

iShares/BlackRock

Trading Fixed Income ETFs

PB13 2012 Q3 2012 Q3

for as long as the premium or the discount is not large enough to trigger an arbitrage opportunity.

Participants incur transaction costs in executing underlying transactions. As mentioned earlier, in FI markets a funds NAV is determined using the bid or mid of the underlying market, while individual bonds purchased to facilitate the creation of new FI ETF shares are acquired on the offer side of the market. As a result, creation costs are meaningful when there is sufficient buying pressure to result in the creation of new shares. Strong selling pressure, on the other hand, results in securities redemptions executed on the bid side of the market, which is in line with where the fund is valued. As long as the premium or discount is less than these transactions costs, there is no arbitrage opportunity.

Creation costs for a given FI ETF, and the resultant impact on the funds premium is dependent upon the cost of executing the underlying bonds, taxes, custodian fees and F x charges. As the impact of creation costs on a FI ETF premium is incurred only by new investors, existing investors in the fund are not affected.

To what extent transaction costs are reflected in the price of a FI ETF is a function of trading flows. In balanced markets (i.e. symmetrical buy versus sell orders), for smaller trades there is no need for APs to access the underlying market, there-fore only a fraction of the underlying market bid/offer spread is reflected in the price of the FI ETF. In unbalanced markets (e.g. excessive buy orders), the entire underlying bid/offer spread may be priced in.

Other factors besides creation costs impact on the arbitrage opportunity. For example, it can be difficult for APs to execute what appears to be arbitrage op-portunity during periods of high market volatility.

Combining these factors, the level of the premium or discount to fair value for any FI ETF is a function of the creation/redemption cost of the fund, the fund flows in the secondary market and the level of execution risk for creating and redeeming shares in the underlying market.

Spread size and liquidityThe bid/offer spreads of FI ETFs on-exchange are quite often tighter than the traditional underlying bond spreads. For example, this can be seen when com-paring the on-exchange spread of the iShares markit iBoxx Euro Corporate Bond with the weighted spread of the index bonds shown in the chart below.

To ensure the best execution for its clients, iShares operates a multi-dealer mod-el, whereby multiple market-makers price its FI ETF offering where possible. This generally provides for tighter spreads, typically increases order book depth and enables clients to trade without difficulty especially during volatile periods.

Both spreads and volumes should be considered when assessing how easy it is to trade in and out of a FI ETF. Funds with wide spreads may be supported by

high volume at these levels,so that large orders may not shift the spreads, whereas funds with tight spreads but limited liquidity may not be able to absorb large orders at these tight levels and, as a result, will be more costly to trade.

Market liquidity is a term referring to the amount of volume that can be traded without moving the market against the trader (market impact). The available trading volume is driven by the size of the underlying bond market capitalisa-tion, rather than the size of a FI ETF, given the ability of APs to create and redeem shares. Typically, market-makers show on the screen a fraction of the size they can trade at any moment in time and, generally, larger orders can be executed inside the spread.

iShares markit iBoxx Euro High Yield Bond is a good example of a FI ETF, which periodically is traded in larger deal sizes than its Average daily Volume (AdV). The chart below shows trading activity over a three month period.

iShares/BlackRock

Trading Fixed Income ETFs

PB14 2012 Q3 2012 Q3

Currency ImpactA further factor to consider when trading FI ETFs is currency. A FI ETFs official currency is its base currency, and it is this currency which is used to calculate a FI ETFs official NAV. iShares FI ETFs are not hedged for currency exposure. For example, when buying the iShares Barclays Capital global Inflation-Linked Bond in USD, an investor will have exposure to all currencies in the basket against his local currency. The funds base currency is USD, but bond currencies are not hedged against the USd or any other currency. Pricing in the secondary and pri-mary markets will use the applicable spot rates to the USD.

Blackrock Advisors (UK) Limited, which is authorised and regulated by the Financial

Ser vices Authorit y (FSA), having its registered of fice at 12 Throgmor ton Avenue, London,

EC2N 2dL, England, Tel +44 (0)20 7743 3000, has issued this document for access by

Professional Clients only and no other person should rely upon the information contained

within it. iShares plc, iShares II plc, iShares III plc, iShares IV plc, iShares V plc and iShares VI

plc (together the Companies) are open-ended investment companies with variable capital

having segregated liabilit y between their funds organised under the laws of Ireland and

authorised by the Financial regulator.

For investors in Austria

The funds mentioned in this document are registered for public of fer in Austria. The sales

prospectuses for the Companies, Key Investor Information document and other documents

as well as the annual and semi-annual repor ts have been published in Austria and are

available free of charge from raif feisen Zentralbank sterreich Ag, Am Stadtpark 9, 1030

Vienna, the Austrian paying and information agent and are also available on the website

www.ishares.com. Any decision to invest must be based solely on the information contained

in the Companys Prospectus, Key Investor Information document and the latest half-yearly

repor t and unaudited accounts and/or annual repor t and audited accounts. Investors

should read the fund specific risks in the Key Investor Information document and the

Companys Prospectus. In respect of the Irish-domiciled funds, the Companies intend to

fulfil the requirements for treatment of all of their sub-funds as white funds. Therefore the

Companies have an Austrian tax representative who calculates the Austrian deemed

distributed Income figures once a year and files an electronic tax return with the Austrian

ministr y of Finance. However, it cannot be guaranteed that the requirements will be met in

the future. The Companies reser ve the right to give up the white status and to not under take

such tax filings.

For investors in Denmark

This document is directed at Professional Investors in denmark only and are authorised by

Finanstilsynet, the danish Financial Super visor y Authorit y.

Any decision to invest must be based solely on the information contained in the Companys Prospectus,

Key Investor Information document and the latest half-yearly report and unaudited accounts and/or annual

report and audited accounts. Investors should read the fund specific risks in the Key Investor Information

document and the Companys Prospectus. Copies of all documentation can be obtained free of charge

from (i) offices of the local agent in denmark, Nordea Bank danmark A /S, Strandgade 3, dK 0900 Copen-

hagen C, denmark Tel:

+45 33 33 33 01 Fax: +45 33 33 10 31 email: [email protected] and (ii) on the Companies in-

ternet website at the address www.iShares.com (http://www.ishares.com/ global/content/europe/ishares_

danish_country_supplement.pdf and http://www.ishares. com/global/content/europe/ishares_2_dan-

ish_country_supplement.pdf ). This document is strictly confidential and may not be distributed without

authorisation from Blackrock Advisors (UK) Limited. In line with most other non-danish funds, the iShares

range will not have distributor status under danish tax law, for which reason investors will generally be

subject to tax based on the annual change in value of their investment irrespective of whether iShares are

sold or not (mark-to-market taxation). For individuals this may be less tax efficient than upon investment in

a comparable danish investment fund with distributor status.

For investors in Finland

The funds mentioned are registered for public distribution in Finland and are authorised by

the Finanssivalvonta (Fiva), the Financial Super visor y Authorit y (FIN-FSA), in Finland. Any

decision to invest must be based solely on the information contained in the Companys

Prospectus, Key Investor Information document and the latest half-yearly repor t and

unaudited accounts and/or annual repor t and audited accounts. Investors should read the

fund specific risks in the Key Investor Information document and the Companys Prospectus.

This document is strictly confidential and may not be distributed without authorisation from

Blackrock Advisors (UK) Limited.

For investors in France

This document does not constitute an of fer or solicitation in relation to the shares of the

Companies. All subscriptions for shares in a sub-fund of one of the Companies are carried

out on the terms of the Companys Prospectus, Key Investor Information document and

other documents, the French addendum and the Supplements of the Companies as the case

may be. Investors should read the fund specific risks in the Key Investor Information

document and the Companys Prospectus. These documents can be obtained by contacting

the paying agent of the Companies: BNP Paribas Securities Ser vices, 3 rue dAntin, 75002

Paris, tel: 00 33 1 42 98 10 00 or by visiting the French section of www.iShares.com. The

Companies are under takings for collective investment in transferable securities (UCITS)

governed by foreign laws and authorised by the Central Bank of Ireland as UCITS complying

with European regulations on 14 Februar y 2000 and 23 december 1999 respectively. The

European directive on collective investment schemes (UCITS), n 85-611 dated 20 december

1985, established a set of common rules in order to permit the cross border marketing of

collective investment schemes complying with the directive. This common foundation did

not prohibit dif ferent methods of implementation. This is why a European collective

investment scheme may be marketed in France even though the activit y of such scheme

would not respect rules identical to those which govern the approval of this t ype of product

in France. Please note that the distribution of shares in cer tain sub-funds of the Companies

is not authorised in France.

For investors in Germany

The sales prospectus and Key Investor Information document, as well as the annual and

semi-annual repor ts are available free of charge from Commerzbank Ag, Jrgen-Ponto-

Platz 1, 60301 Frankfur t. In respect of the Irish-domiciled funds, the Companies intend to

fulfil the prerequisites for treatment of their sub-funds as so-called transparent funds

pursuant to 2 and 4 of the german Investment Tax Act (Investmentsteuergesetz InvStg).

Any decision to invest must be based solely on the information contained in the Companys

Prospectus, Key Investor Information document and the latest half-yearly repor t and

unaudited accounts and/or annual repor t and audited accounts. Investors should read the

fund specific risks in the Key Investor Information document and the Companys Prospectus. However, it

cannot be guaranteed that the requirements will be met. The Companies reser ve the right to give up the

transparent status and to not under take the necessar y publications.

For investors in Iceland

The funds mentioned in this document are not registered for public distribution in Iceland.

The investment described in this memorandum is not a public of fering of securities. It is not

registered for public distribution in Iceland with the Financial Super visor y Authorit y

pursuant to the Icelandic Act on Under takings for Collective Investment in Transferable

Securities (UCITS) and investment Funds No. 30/2003 and supplementar y regulations. The

investment may not be of fered or sold by means of this memorandum or any way later resold

otherwise than in accordance with Ar ticle 13 of the regulation on UCITS and Investment

Funds No. 792/2003. This document is intended for information purposes only and does not

constitute investment advice or an of fer to sell or a solicitation of an of fer to buy the funds

described within and no steps may be taken which would constitute or result in a public

of fering of the funds in Iceland. This document is strictly confidential and may not be

distributed without authorisation from Blackrock Advisors (UK) Limited.

Please read the prospectus and ensure that you are eligible to invest under the local regulator y and finan-

cial rules, and comply with restrictions on foreign currency investments, that exist for Icelandic investors.

We recommend that you seek independent financial advice before making any investment decision. This

document is for your information only. Accordingly, this document and relevant information may not be

used for any other purpose or passed on to any other person in Iceland. The funds described in this docu-

ment are not registered for public distribution in Iceland and may not be of fered, sold or resold to the pub-

lic in Iceland. Any decision to invest must be based solely on the information contained in the Companys

Prospectus, Key Investor Information document and the latest half-yearly repor t and unaudited accounts

and/or annual repor t and audited accounts. Investors should read the fund specific risks in the Key

Investor Information document and the Companys Prospectus.

For investors in Ireland

This document is strictly confidential and may not be distributed without authorisation from

Blackrock Advisors (UK) Limited. With respect to funds that are registered for public of fer in

Ireland, impor tant information on the Companies is contained in the relevant Prospectus,

Key Investor Information document and other documents, copies of which can be obtained

by calling 0845 357 7000, from your broker or financial adviser, by writing to Blackrock

Advisors (UK) Limited, iShares Business development, 12 Throgmor ton Avenue, London,

iShares/BlackRock

Trading Fixed Income ETFs

PB15 2012 Q3 2012 Q3

EC2N 2dL or by writing to the manager of the Companies: Blackrock Asset management

Ireland Limited, New Centur y House, International Financial Ser vices Center, mayor Street

Lower, dublin 1, Ireland. Investors should read the fund specific risks in the Key Investor

Information document and the Companys Prospectus.

For investors in Israel

Blackrock Advisors (UK) Limited is not licensed under Israels regulation of Investment

Advice, Investment marketing and Por tfolio management Law, 5755-1995. No action has

been or will be taken in Israel that would permit a public of fering or distribution of the Funds

mentioned in this document to the public in Israel. The Funds mentioned in this document

have not been approved by the Israeli Securities Authorit y. In addition, the Funds mentioned

in this document are not regulated under the provisions of Israels Joint Investment Trusts

law, 5754-1994 (the Joint Investment Trusts Law). This document has not been approved

by the Israel Securities Authorit y and will only be distributed to Israeli residents in a manner

that will not constitute an of fer to the public under sections 15 and 15a of the Israel

Securities Law, 5728-1968 (the Securities Law) or section 25 of the Joint Investment

Trusts Law, as applicable.

The document is being of fered to those categories of investors listed in the First Addendum (the

Addendum) to the Securities Law, (Institutional Investors); in all cases under circumstances that will fall

within the private placement or other exemptions of the Joint Investment Trusts Law, the Securities Law

and any applicable guidelines, pronouncements or rulings issued from time to time by the Israel Securities

Authorit y. This document may not be reproduced or used for any other purpose, nor be furnished to any

other person other than those to whom copies have been sent. Nothing in this document should be con-

sidered investment advice or investment marketing as defined in the regulation of Investment Coun-

selling, Investment marketing and Por t folio management Law, 5755-1995. This document does

not constitute an of fer to sell or solicitation of an of fer to buy any securities, nor does it constitute an of

fer to sell to or solicitation of an of fer to buy from any person or persons in any state or other jurisdiction in

which such of fer or solicitation would be unlaw ful, or in which the person making such of fer or solicitation

is not qualified to do so, or to a person or persons to whom it is unlaw ful to make such of fer or solicitation.

For investors in Italy

Any application for shares in the funds is on the terms of the prospectus, Key Investor

Information document, for the Companies. The Shares of cer tain sub-funds in the

Companies have been admitted to listing in Italy and are currently listed on the mercato

Telematico Fondi of Borsa Italiana S.p.A. The list of the sub-funds listed in Italy, the

Prospectus, of the Companies, the documento di quotazione of the iShares funds, the latest

annual and semi annual repor t of the Companies are published (i) on the Companies

internet website at the address www.iShares.com (ii) on the Irish Stock Exchange internet

website at the address www.ise.ie and (iii) on Borsa Italiana S.p.As website at the address

www.borsaitalia.it. These documents are available for the public in Italian version with

cer tification that such documents are a faithful translation of the original documents.

Investors are entitled to receive free of charge, even at home, a copy of the above documents,

upon written request forwarded to the Companies. Investors should read the fund specific

risks in the Key Investor Information document and the Companys Prospectus. For

comprehensive information on the expenses charged to a fund and fees applicable to

investors, see the documento di quotazione and the Prospectus.

For investors in Jersey

This promotional material may not be of fered to the public in Jersey and only persons to

whom it has been directly communicated by Blackrock Advisors (UK) Limited or its

appointed agent may accept the of fer contained herein. The consent or approval of the

Jersey Financial Ser vices Commission to or of the fund, the promoter or the distribution of

this promotional material in Jersey is not required and has not been obtained.

Blackrock Advisors (UK) Limited is not licensed or authorised under the Financial Ser vices (Jersey) Law

1998. This document is communicated to Jersey residents by Blackrock Advisors (UK) Limited in reliance

on exemptions for cer tain overseas persons provided for by the Financial Ser vices (Jersey) Law 1998 and

its subordinate legislation.

The consent or approval of the Jersey Financial Services Commission (under the Control of Borrowing (Jer-

sey) Order 1958 or otherwise) to or of the Funds / [ETCs] mentioned in this document or the distribution of

this document in Jersey is not required and has not been obtained.

Issued by Blackrock (Channel Islands) Limited, (authorised and regulated by the Jersey Financial Ser vices

Commission). registered of fice: 4th Floor, One Waverley Place, Union Street, St. Helier, Jersey, JE1 0Br.

registered in Jersey, Channel Islands No. 5719. Blackrock investment ser vices provided by Blackrock

Investment management (UK) Limited (authorised and regulated by the Financial Ser vices Authorit y).

registered of fice: 12

Throgmor ton Avenue, London, EC2N 2dL. registered in England No. 2020394. Tel: 020 7743

3000 Website: blackrock.co.uk. For your protection, telephone calls received by Blackrock

Investment management (UK) Limited are usually recorded. Blackrock is a trading name of

Blackrock Investment management (UK) Limited. Any decision to invest must be based

solely on the information contained in the Companys Prospectus, Key Investor Information

document and the latest half-yearly repor t and unaudited accounts and/or annual repor t

and audited accounts. Investors should read the fund specific risks in the Key Investor

Information document and the Companys Prospectus.

For investors in Luxembourg

The Companies have been notified to the Commission de Sur veillance du Secteur Financier

in Luxembourg in order to market their shares for sale to the public in Luxembourg and the

Companies are notified Under taking in Collective Investment for Transferable Securities

(UCITS). The Companies have not been listed on the Luxembourg Stock Exchange, investors

should contact their broker for fur ther information. Investment is subject to the Prospectus,

Key Investor Information document and all documents (the main/umbrella Prospectus, the

Supplement[s], the latest and any previous annual and semi-annual repor ts of the

Companies and the memorandum and Ar ticles of Association of the Companies) will be

available in the Luxembourg, free of charge, from the of fices of the Local Agent, BNP Paribas

Securities Ser vices, Luxembourg Branch 33, rue de gasperich Howald Hesperange L-2085

Luxembourg or by visiting the website on www.iShares.com. Investors should read the fund

specific risks in the Key Investor Information document and the Companys Prospectus.

For investors in Norway

The funds mentioned are registered for public distribution in Norway and are authorised by

Kredittilsynet, the Financial Super visor y Authorit y of Norway. Any application for shares in

the funds is on the terms of the prospectus, Key Investor Information document for the

Companies. Any decision to invest must be based solely on the information contained in the

Companys Prospectus, Key Investor Information document and the latest half-yearly

repor t and unaudited accounts and/or annual repor t and audited accounts. Investors

should read the fund specific risks in the Key Investor Information document and the

Companys Prospectus. This document is strictly confidential and may not be distributed

without authorisation from Blackrock Advisors (UK) Limited.

For investors in Spain

The funds mentioned are registered for public distribution in Spain the sales prospectus has been

registered with the Spanish Securities market Commission (Comisin Nacional del mercado de

Valores (CNmV)). The funds which are registered in the official registry of the Spanish Securities

and Exchange Commission (CNmV) are iShares plc (registration number 801), iShares II plc

(registration number 802) and iShares III plc (registration number 806). In order to check which

subfunds pertaining to the aforementioned funds are registered for public distribution in Spain,

the official registry CNmV must be always previously checked. Any decision to invest must be

based solely on the information contained in the Companys Prospectus, Key Investor Information

document and the latest half-yearly report and unaudited accounts and/or annual report and

audited accounts, copies of which can be obtained free of charge on the Companies internet

website at the address www.iShares.es. Investors should read the fund specific risks in the Key

Investor Information document and the Companys Prospectus.

For investors in Sweden

The funds mentioned are registered for public distribution in Sweden and are authorised by

Finansinspektionen, the Swedish Financial Super visor y Authorit y. Any application for

shares in the funds is on the terms of the prospectus, Key Investor Information document,

for the Companies. Impor tant information on the Companies is contained in the relevant

Prospectus, Key Investor Information document and other documents, copies of which can

be obtained free of charge from of fices of the local agent SEB, merchant Banking, Custody

Ser vices, global Funds, rB6, rissnelden 110, SE-106 40 Stockholm, Sweden, Telephone:

+46 8 763 5960, Fax + 46 8 20 10 96. Any decision to invest must be based solely on the

information contained in the Companys Prospectus, Key Investor Information document

and the latest half-yearly repor t and unaudited accounts and/or annual repor t and audited

accounts. Investors should read the fund specific risks in the Key Investor Information

document and the Companys Prospectus.

For investors in Switzerland

The Swiss Financial market Supervisory Authority FINmA has authorised Blackrock Asset

management Schweiz Ag, Claridenstrasse 25, 8002 Zurich, to act as Swiss representative and

JPmorgan Chase Bank, National Association, Columbus, Zurich branch, dreiknigstrasse 21,

8002 Zurich, to act as Swiss Paying Agent of the Company. The prospectus, Key Investor

iShares/BlackRock

Trading Fixed Income ETFs

PB16 2012 Q3 2012 Q3

Information document, the Articles of Incorporation, the latest and any previous annual and

semi-annual reports of the Company are available free of charge from the Swiss representative. Investors

should read the fund specific risks in the Key Investor Information document and the Companys Prospec-

tus.

For investors in the Netherlands

The Companies have been notified to the Authority Financial markets in the Netherlands in

order to market their shares for sale to the public in the Netherlands and the Companies are,

accordingly, investment institutions (beleggingsinstellingen) according to Section 2:72 dutch

Financial markets Supervision Act of Investment Institutions. The Companies will consequently,

in respect of such notification, be subject to the Netherlands Act on the Supervision of

Investment Institutions, regulations enacted pursuant thereto and the supervision thereunder

of the Authority Financial markets. The Companies have been admitted to listing on the stock

exchange of Euronext Amsterdam N.V. and are, consequently, subject to the regulations of

Euronext Amsterdam N.V. Copies of all documents (the main/umbrella Prospectus, Key Investor

Information document, the Supplement[s], the latest and any previous annual and semi-annual

reports of the Companies and the memorandum and Articles of Association of the Companies)

will be available in the Netherlands, free of charge, from the offices of the representative in the

Netherlands, Blackrock Advisors (UK) Limited dutch Branch, rembrandt Toren, 17th floor,

Amstelplein 1, 1096 HA Amsterdam, Netherlands or by calling the dutch representatives

information request line on 0800 0233 466. Investors should read the fund specific risks in the

Key Investor Information document and the Companys Prospectus.

For investors in the UK

most of the protections provided by the UK regulator y system do not apply to the operation

of the Companies, and compensation will not be available under the UK Financial Ser vices

Compensation Scheme on its default. The Companies are recognised schemes for the

purposes of the Financial Ser vices and markets Act 2000. Any decision to invest must be

based solely on the information contained in the Companys Prospectus, Key Investor

Information document and the latest half-yearly repor t and unaudited accounts and/or

annual repor t and audited accounts. Investors should read the fund specific risks in the Key

Investor Information document and the Companys Prospectus.

Restricted Investors

This document is not, and under no circumstances is to be construed as an adver tisement

or any other step in fur therance of a public of fering of shares in the United States or Canada.

This document is not aimed at persons who are resident in the United States, Canada or any

province or territor y thereof, where the companies/securities are not authorised or

registered for distribution and where no prospectus has been filed with any securities

commission or regulator y authorit y. The companies/securities may not be acquired or

owned by, or acquired with the assets of, an ErISA Plan.

Risk Warnings

Investment in the products mentioned in this document may not be suitable for all investors.

Past per formance is not a guide to future per formance and should not be the sole factor of

consideration when selecting a product. The price of the investments may go up or down and

the investor may not get back the amount invested. Your income is not fixed and may

fluctuate. The value of investments involving exposure to foreign currencies can be af fected

by exchange rate movements. We remind you that the levels and bases of, and reliefs from,

taxation can change.

Blackrock has not considered the suitabilit y of this investment against your individual needs and risk toler-

ance. The data displayed provides summar y information, investment should be made on the basis of the

relevant Prospectus which is available from Blackrock Advisors (UK) Limited.

In respect of the products mentioned this document is intended for information purposes only and does

not constitute investment advice or an of fer to sell or a solicitation of an of fer to buy the securities de-

scribed within. This document may not be distributed without authorisation from Blackrock Advisors (UK)

Limited.

Index Disclaimers

Barclays Capital is a trade mark of Barclays Capital, the investment banking division of

Barclays Bank PLC (Barclays Capital), and is used by Blackrock Advisors (UK) Limited under

licence. With a distinctive business model, Barclays Capital provides corporates, financial

institutions, governments and supranational organisations with solutions to their financing

and risk management needs. Barclays Capital compiles, maintains and owns rights in and to

the Barclays Capital Euro Corporate ex Financials Bond Index and Barclays Capital World

government Inflation-Linked Bond Index (together the indices). iShares Barclays Capital

Euro Corporate Bond ex-Financials and iShares Barclays Capital global Inflation-Linked Bond

(the funds) are not sponsored, endorsed, sold or promoted by Barclays Capital and Barclays

Capital makes no representation regarding the advisability of investing in the funds.

markit iBox x is a registered trade mark of markit Indices Limited and has been licensed for use by Black-

rock Advisors (UK) Limited. markit Indices Limited does not approve, endorse or recommend Blackrock

Advisors (UK) Limited or iShares plc. These products are not sponsored, endorsed or sold by markit Indices

Limited and markit Indices Limited makes no representation regarding the suitabilit y of investing in these

products.

iShares and Blackrock are registered trademarks of Blackrock, Inc., or its subsidiaries in the United States

and elsewhere.

2012 Blackrock Advisors (UK) Limited. registered Company No. 00796793. All rights reser ved. Calls may

be monitored or recorded.

2012 Blackrock, Inc. All rights reser ved. BL ACKrOCK, BL ACKrOCK SOLUTIONS, AL AddIN, iSHArES,

LIFEPATH, SO WHAT dO I dO WITH mY mONE Y, INVESTINg FOr A NEW WOrLd, and BUILT FOr THESE TImES

are registered and unregistered trademarks of Blackrock, Inc. or its subsidiaries in the United States and

elsewhere. All other trademarks are those of their respective owners.

Contact us

For more information on iShares ETFs, please visit our website on www.iShares.com

Alternatively, please call us on :

From Sw1tzerland : 0800 33 66 88 From t he Netherlands: 0800 0233 466 From the UK: 0845 357 7000

From Germany and Austria: +49 (0) 89 42729 58 58 From Luxembourg g: +31 20 560 09 33 From Italy:

800 898085

From Spain : +34 91 788 94 00 From Den mar k: 80 88 48 45 From Fin land: 0800 918 277 From Norway:

800 14 3 24 From Sweden: 020 796238 From lsrael: +44 207 743 1 659

www.iShares.com ISHARES BLACKROCK

iShares/BlackRock

Trading Fixed Income ETFs

PB17 2012 Q3 2012 Q3

Index fund management has gained much media attention in recent years, not least for the astonishingly rapid growth of the ETF market. However, we believe that there are more compelling reasons for the increasing presence of index products in institutional portfolios, as stand-alone investments or as bricks of a broader asset allocation portfolio.

Index fund management is relatively new to the fund management arena, its origins dating back only to the early 1970s. When one remembers that the birth of hedge funds dates back to the 1920s and that of private equity to the 1940s, we can appreciate how young indexing is. Indeed, the index fund management sector has yet to reach maturity: the undeniable success of ETFs in recent years is still spawning innovations for the whole asset management industry, both in terms of asset classes covered, easy market access and quick implementation of investment decisions.

Thirty years of debateSince the launch of the first index fund, much has been written about the rela-tive merits of active management versus index management. After thirty years of debate, it is now well-recognised that these two investment approaches are not competing with one another. On the contrary, index products can be viable tools for active managers to gain quick and cheap exposure to specific asset classes, sectors, styles, countries, and so on.

With just one trade, the active manager can implement his views in his portfolio opening or increasing exposure to Brazilian or Chinese equities, for example without any of the operational issues he would face if he had to implement these portfolios himself.

We are well aware of this trend within THEAM: indeed, we see increasing num-bers of active managers investing in our tracker and indexed funds and ETFs. This has led us to taking