Exchange Traded Funds (ETFs)

Exchange Traded Funds (ETFs)

2013 J.P. Morgan Global ETF Handbook

This is intended for informational use only and is not intended as an offer to sell or buy shares of any ETF listed herein.

Copyright 2013 JPMorgan Chase & Co. All rights reserved.

May 2013

ETFs are designed to allow an investor to quickly and easily obtain a desired market or benchmark exposure, by trading just a single security. ETF shares may offer intraday liquidity, and continuous, real-time trading and pricing.

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Table of Contents

Exchange Traded Funds ? ETFs ..................................... 4 ETF Market Overview ...................................................... 6 Quant-Based ETFs.......................................................... 8 China Equity Markets and the QFII Program ................. 13 Enhanced ETF Analytics ............................................... 17 Endnotes ....................................................................... 19 US Listed ETFs ............................................................. 20 Canada & Latin America Listed ETFs ............................ 30 EMEA Listed ETFs ........................................................ 36 Asia-Pacific Listed ETFs................................................ 58 Contacts, Disclaimer & Disclosures ............................... 63

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Exchange Traded Funds ? ETFs

What Are ETFs? Each share of an ETF represents a fractional ownership interest in a portfolio of securities, commodities or other instruments. This investment medium has captured significant market interest. As of May 2013, total ETF assets under management have grown to over $2,143 Bn globally (see Figure 1 for a list of regions included in this calculation). In addition, the number of listed ETFs globally (in those same regions) has grown to more than 5,300 (with almost 4,000 listed in the US and Europe). Furthermore, over the past year, the daily turnover of US ETFs was on average ~29% of total equity daily turnover.

Characteristics of ETFs ETFs have some characteristics that are similar to those of both stocks and open-end mutual funds, but also have many characteristics different from stocks and open-end funds. Like stocks, ETFs are listed on one or more stock exchanges. They also trade in the third market (i.e. over the counter) and through Electronic Communication Networks (ECNs). Like open-end funds, ETFs are available on a wide range of both broad and narrowly focused indices or they can be actively managed. An ETF investor effectively can go long or sell short an entire portfolio of securities by trading a single listed ETF.1

Advantages of Using ETFs Index-tracking ETFs generally provide an effective way to track the underlying benchmarks because the ETFs themselves typically trade at or about the net asset value of the ETF, which is closely correlated to the index.

Index-linked ETFs are designed to allow an investor to obtain a desired market or benchmark exposure by trading just a single security. ETF shares are designed to offer intraday liquidity, and continuous, real-time trading and pricing. Generally, ETFs can be sold short and can be purchased on margin by an investor seeking leverage.2

They are also intended to be tax efficient. Mutual funds are often forced to liquidate portions of their holdings, in order to meet investor redemptions; this can generate capital gain distributions for shareholders. Many ETFs, on the other hand, are created and redeemed "in-kind" by Authorized Participants. As a result, capital gain distributions and the internal costs associated with buying and selling securities in response to shareholder activity may be minimized.3 Many ETFs such as those linked to commodities or fixed-income indices use in-cash creation and redemptions. These ETFs will not benefit from the tax advantages enjoyed by equity-linked ETFs that create and redeem on an in-kind basis.

Do ETFs Pay Dividends?4 It depends on the type of ETF. ETFs that invest in stocks and securities are required to be registered under the 1940 Act and qualify as regulated investment companies (RICs) under the Internal Revenue Code (IRC). These ETFs typically make distributions on a quarterly, monthly or irregular basis, but in all events, at least annually. Distributions must be made each year in order to eliminate any entity level tax, by distributing all of their ordinary income and long-term capital gains. There is no distribution requirement for other ETFs (e.g.

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ETFs based on commodities or currencies) and such ETFs typically do not make distributions.

Liquidity and Trading Liquidity is one of the key benefits that ETFs can offer. ETFs are listed on exchanges and trade in the over-the-counter market as well. Broker-dealers acting as "Authorized Participants" can create new ETF shares.5 The result is that each ETF can be as liquid as its underlying securities, commodities or other instruments. In the primary market, ETFs are issued by trusts, limited partnerships or other vehicles in large-sized blocks (typically 50,000 shares) called "Creation Units." For ETFs that are created on an in-kind basis, each "Authorized Participant" deposits a specified portfolio with the trustee or its administrator, sponsor or distributor in exchange for a Creation Unit. The Creation Unit is then broken up by the Authorized Participant, and the ETF shares are offered on exchanges in the secondary market where investors can buy or sell ETF shares in smaller quantities. Similarly, for ETFs that are subject to redemption on an in-kind basis, "Authorized Participants" can redeem ETFs by exchanging a Creation Unit of the ETF for receipt from the ETF of assets comprising the underlying portfolio.6

Snapshot of the Global ETF Market Figure 1 below depicts total global assets under management (AUM) held in ETFs in billions of US dollars, broken down by region. USlisted ETFs, followed by European-listed ETFs, account for the largest portion of total ETF assets.

Figure 1: Global AUM ($Bn)

$75 $161

$382

US Europe / Mid. East / Africa Asia / Pacific Canada & Latin America

$1,524

Source: J.P. Morgan Quantitative and Derivatives Strategy, Bloomberg. Data as of May 2013.

Exchange Traded Funds ? ETFs

Risks and Considerations ETF shareholders are subject to risks similar to those of holders of other portfolios of securities or commodities. A primary consideration is that the general level of prices within the portfolio may decline, adversely affecting the value of each ETF share for ETFs that provide long exposure. For ETFs providing inverse or "short" exposure, the value of the ETF will go down as the prices of the instruments in the underlying portfolio increases. In addition, ETF shares may decline in value if the overall depth and liquidity of the secondary market decreases. A sector-focused ETF may be adversely affected by the specific performance of its targeted benchmark. International investments may involve the risk of capital loss as a result of unfavorable fluctuations in currency values, differences in generally accepted accounting principles, or economic and political instability in the nations represented by issuers of the underlying securities or other countries. Actively managed ETFs may perform better or worse than the benchmark or market sector they are designed to beat. Although the net asset values of index-linked ETFs typically correlate closely to the underlying indices, the market prices for these ETFs (particularly in the case of certain fixed income index-linked ETFs) may be discounted as compared to the ETF's net asset value (NAV). Although index-linked ETFs are designed to provide investment results that generally correspond to the price and yield performance of their respective underlying indices, ETF managers may not be able to exactly replicate the performance of the indices because of expenses and other factors. ETF shareholders are typically subject to expense fees charged by the issuer, and transactions are subject to standard brokerage commissions and markups/markdowns. For a more comprehensive list of other risk factors, see the "Possible Risks of Investing in ETFs" section at the end of this document.

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