Understanding

Exchange Traded Funds

September 9, 2015

Presented by

Paul Baiocchi
Director, Sector Investment Strategy

AGENDA
What is an ETF/ETP?
ETF basics
ETFs vs. mutual funds
Different ETF structures

The ETF Market

By asset class
By issuer
Trends

Fidelitys ETF Ecosystem

Fidelitys ETF products
Fidelitys ETP tools and resources

What is an ETF/ETP?

What is an ETF?
ETF Basics: Know Your Tickers
An ETF is an evolution of the mutual fund which:

Trades intraday
Typically discloses holdings daily
Can be optioned, shorted, or margined
Potentially more tax efficient

What is an ETF?
ETFs vs. Mutual Funds
Mutual Fund

ETF
Shareholder

Shareholder

Broker/Dealer
3

Mutual Fund

Market Maker/Authorized Participant

Demand exceeds supply of ETF shares on Secondary Market

Stock Market
2

Authorized
Participant

Stock Market

Basket of
Securities

ETF
Shares
2

ETF

Shareholder sends cash to the mutual fund directly

AP acquires the basket of securities from the market

Mutual fund purchases securities from the market

AP delivers the basket and cash to the ETF

Mutual fund shares are delivered to the shareholder @ NAV

ETF delivers ETF shares @ NAV to AP

What is an ETF?
Traditional Mutual Fund Purchase Process
Mutual Fund
1

Shareholder sends cash to the mutual

fund directly

Mutual fund purchases securities from

the market

Mutual fund shares are delivered to the

shareholder @ NAV

Shareholder

Mutual Fund

Stock Market

Mutual fund trades are taxable

events to the fund

KEY

What is an ETF?
ETF Share Purchase Scenarios

NAV

ETF Shares at NAV

SEC

Individual Securities

BOS

Basket of Securities

Scenario 1

Scenario 2

Supply of ETF shares on Secondary Market

satisfies demand

Create Required: Demand exceeds supply of ETF shares

on Secondary Market

MP

Broker/Dealer

MP
Market Maker

Secondary
Market

Shareholder

MP

Broker/Dealer
$

MP

Market Maker
$

Secondary
Market

Shareholder

MP

NAV

Authorized
Participant
$

SEC

Stock Market

MP

Cash
ETF Shares at Market Price

ETF
BOS

Primary
Market

What is an ETF?
Comparing ETFs and Mutual Funds
ETFs
Costs

Expense Ratios

Expense Ratios

Commissions

Load and No-load funds

Bid-Ask Spreads

Bought/Sold at NAV (may have

redemption fees)

Premiums/Discounts to NAV

Trading
Attributes

Intra-day trading on
secondary Market
Allows Limit, Stop and
Conditional Orders
Allows Shorting and Margin

Access,
Transparency
& Taxes

Many sub-sector and

industry-focused ETPs in
addition to broader market
ETPs

Transparency of all holdings

nightly
Cap gains tend to be lower
because of Create/Redeem

MUTUAL FUNDS

Bought/Sold at NAV (no load funds)

Most transact once a day at close
No Stop, Limit or Conditional
Orders
No Shorting (Margin 30 days)
Most funds focus on broader
markets; few sub-sector funds
Holdings data usually at least 1
month old
Less tax efficient structure, all
shareholders bear tax burden

What is an ETF?
The Full Cost of Ownership

Expense Ratio

Bid is the price at

which one can sell.
Ask is the price at
which one can buy.

Bid/Ask Spread

Commission/Trading Fee

Additional costs
are incurred as
the bid/ask
spread widens.

Taxes

Tracking Error/Alpha

Image for illustrative purposes only.

In this case, the

opening value of
the underlying
basket is above
the ask.

Risks: Biggest Does Not Mean Best

140%
120%

Ticker

AUM (MM)

PGJ

$193

MCHI

$2,043

GXC

$1,054

FXI

$6,594

100%
80%
60%
40%
20%
0%
Jul-12

Jan-13

Jul-13

Jan-14

Jul-14

Jan-15

Jul-15

-20%

iShares China Large-Cap ETF (FXI)

iShares MSCI China ETF (MCHI)
Powershares Golden Dragon China Portfolio (PGJ)
SPDR S&P China ETF (GXC)

Source: Bloomberg as of 7/31/15. Performance data shown represents past performance and is no
guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or
loss when shares are sold. Current performance may be higher or lower than that quoted.

10

What is an ETP?
Different Exchange Traded Product Structures

Traditional ETFs

ETNs

Grantor Trusts

Are open-end
registered investment
companies

Are unsecured debt

obligations of the
issuer

Trusts holdings
typically do not
change

Can be either index or

actively managed
(most are index)

Tend to focus on
commodities and
currencies

Often used for

Commodity &
Currency ETPs

Can hold different

types of securities

Investor assumes the

credit risk of the ETN
issuer

Many hold physical

commodities or
currencies, but can
hold securities

Most ETFs use this

structure

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ETNs do not provide

an ownership interest
in any underlying
assets

Partnerships
Mostly used for
Commodity ETPs
Often used for ETPs
that invest in futures
contracts
Investors treated as
partners for tax
purposes and receive
a Schedule K-1

Risks: True Cost

Not All Expense Ratios are Created Equal
Asset Weighted Expense Ratio

0.95%

0.79%

0.51%
0.40%
0.28%

Alternative

Allocation

Source: Morningstar, Bloomberg as of 7/31/15.

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Commodities

Convertibles

Equity

0.26%

0.23%

Tax Preferred Fixed Income

ETF Trading Spreads

Ask Price

Market Maker P&L

Creation/
Redemption Fee

Creation Costs
Forex Hedging Costs
Taxes

Cost to Gather
Underlying Securities

Brokerage Fees

ETF
Spread

Underlying
NAV

Spread

Underlying Bid/Ask
Brokerage Fees

Cost of Risk

Taxes
Forex Hedging Costs

TOTAL COST OF BID/

ASK SPREAD

Redemption Fees
Bid Price

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Source: SSgA

Market Maker P&L

The ETF Market

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The ETF Market

$2,500
$2,000

Now more
than
$2 trillion
in AUM

$1,500
$1,000
$500

Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15

$-

Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over
a specified period of time longer than one year.

15

AUM

Growing Rapidly: 24% CAGR Over the Past 10 Years

Source: Morningstar as of 6/30/15 AUM ($B)

The ETF Market

100%
90%
Municipal Bond

80%

Allocation

70%

US Equity

60%
50%

Taxable Bond

40%

Sector Equity

30%

International Equity

20%

Commodities

10%

Alternative

16

Jun-15

Dec-14

Jun-14

Dec-13

Jun-13

Dec-12

Jun-12

Dec-11

Jun-11

Dec-10

Jun-10

Dec-09

Jun-09

Dec-08

Jun-08

Dec-07

Jun-07

Dec-06

Jun-06

Dec-05

Jun-05

0%

Source: Morningstar as of 6/30/15

AUM

Growing Rapidly: Equities Still Dominate, but Fixed Income Growing

Bond
ETFs now
15% of
ETF AUM

The ETF Market

The Big Three Dominate
June 2015

League Table
AUM by Issuer
Division Name
Issuer

June 2015 AUM ($B)

Blackrock

807

Vanguard

477

SSgA

419

Total

17

1,702

Responsible for 80% of

ETF AUM
Sponsor 18 of the top 20
ETFs by AUM

Provide predominantly lowcost, passive exposure to

core assets classes

The ETF Market

Beyond the Big Three, Other Issuers Offer Choice
AUM ($B)
PowerShares

$92

WisdomTree

$63

First Trust

$39

Charles Schwab

$35

Guggenheim

$31

ProShares

18

$25

Market Vectors

$21

Deustchebank

$19

PIMCO

$12

ALPS

$11

Source: Morningstar as of 6/30/15

Smaller Issuers
Providing
Focused, Nuanced
Exposure

The ETF Market

Trends to Watch
Smart/Strategic Beta
Passive Indexes focused on Factors

Currency Hedged
Removing currency movements from foreign equity exposure

Active Fixed Income

Tapping into manager expertise and leverage scale

Sector Rotation
Using Sector ETFs to rotate among economic sectors

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Fidelitys ETF Ecosystem

20

Fidelity ETFs
Fidelity Sector ETFs
Why Fidelity
Sector Index ETFs?
Bringing together Fidelitys asset management
expertise and BlackRocks infrastructure, the
Fidelity MSCI Sector Index ETF suite provides
world class comprehensive, transparent, and
efficient exposure to all 10 sectors of the market.

Purchase Information
Net Expense Ratio:

0.12%

Stock Exchange:

NYSE Arca

Fidelity Trading Fees1:

Purchase commission Free/30-day

short-term trading fee1

Tickers and Fund Names

FDIS

Fidelity MSCI Consumer Discretionary Index ETF

FIDU

Fidelity MSCI Industrials Index ETF

FSTA

Fidelity MSCI Consumer Staples Index ETF

FTEC

Fidelity MSCI Information Technology Index ETF

FENY

Fidelity MSCI Energy Index ETF

FMAT

Fidelity MSCI Materials Index ETF

FNCL

Fidelity MSCI Financials Index ETF

FCOM

Fidelity MSCI Telecommunication Services Index ETF

FHLC

Fidelity MSCI Health Care Index ETF

FUTY

Fidelity MSCI Utilities Index ETF

FREL

Fidelity MSCI Real Estate Index ETF

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Free commission offer applies to online purchases of Fidelity ETFs in a Fidelity brokerage account with
a minimum opening balance of $2,500. The sale of ETFs are subject to an activity assessment fee (of
between $0.01 to $0.03 per $1000 of principal) by Fidelity. After 02/01/2014, Fidelity ETFs are subject to
a short-term trading fee by Fidelity, if held less than 30 days.

Fidelity ETFs
Fidelity Active Fixed Income ETFs
DURATION SPECTRUM
SHORTER

Summary

Cost

LONGER

Fidelity Limited Term

Bond ETF (FLTB)

Fidelity Total Bond ETF

(FBND)

Fidelity Corporate Bond

ETF (FCOR)

AUM: $142.9M
30 Day SEC Yield: 1.17%
Effective Duration: 2.81 years

AUM: $104.4M
30 Day SEC Yield: 3.37%
Effective Duration: 5.35 years

AUM: $29.4M
30 Day SEC Yield: 3.43%
Effective Duration: 6.86 years

A credit oriented strategy serving

clients with shorter investment
horizons

The multi sector approach reflects

some of the capabilities Fidelity
has to offer and brings a depth
and breadth of resources to
serve client needs

A credit oriented strategy

serving clients with longer
investment horizons

Expense Ratio: 45 bps

Commission Free Trading

Expense Ratio: 45 bps

Commission Free Trading

Expense Ratio: 45 bps

Commission Free Trading

Assets noted are as of 06/30/2015. Information presented, including 30 day SEC yield,
effective duration, and fee are as of 07/16/2015. Source Fidelity Investments.

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Fidelitys Commission Free ETF Platform

Fidelitys Platform Offers Both Active & Passive ETFs
Our ETF Strategy Seeks to Deliver
Choice

Value

Innovation

iShares ETFs choose

from 70 iShares with broad
and diverse asset classes

Fidelity 11 sector ETFs with

some of the lowest expense
ratio in the industry

Active ETFs with the

launch of 3 Fidelity Active
Fixed Income ETFs, Fidelity
is poised to be a leading
innovator in the active ETF
space

Buy online commission-free

all 70 iShares ETFs,
Fidelity sector ETFs &
Fidelity active ETFs

Free commission offer applies to online purchases of Fidelity ETFs and select iShares ETFs in a Fidelity brokerage account. Fidelity accounts may require minimum balances. The sale of ETFs is
subject to an activity assessment fee (of between $0.01 to $0.03 per $1,000 of principal). iShares ETFs and Fidelity ETFs are subject to a short-term trading fee by Fidelity if held less than 30 days.
Strategic Insight Simfund/FI Desktop, data as of 07/31/2013. Based on a comparison of total expense ratios for U.S. sector-level ETFs with similar holdings and investment objectives (using the MSCI
and S&P Global Industry Classification System GICS) within the universe of 298 ETFs Morningstar has classified as the Sector Stock asset class.
For iShares ETFs, Fidelity receives compensation from the ETF sponsor and/or its affiliates in connection with an exclusive, long-term marketing program that includes promotion of iShares ETFs and
inclusion of iShares funds in certain FBS platforms and investment programs. Additional information about the sources, amounts, and terms of compensation is described in the ETFs prospectus and
related documents. Fidelity may add or waive commissions on ETFs without prior notice. BlackRock and iShares are registered trademarks of BlackRock, Inc. and its affiliates.
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold
at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.

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Fidelitys Commission Free ETF Platform

Finding Commission Free ETFs

Look for the

Commission Free
Logo in your ETF
Screen
1

Free commission offer applies to online purchases of Fidelity ETFs and

select iShares ETFs in a Fidelity brokerage account. Fidelity accounts
may require minimum balances. The sale of ETFs is subject to an
activity assessment fee (from $0.01 to $0.03 per $1,000 of principal).
iShares ETFs and Fidelity ETFs are subject to a short-term trading fee
by Fidelity if held less than 30 days.

For illustrative purposes only.

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Fidelitys ETF Tools and Resources

ETF/ETP Research

For illustrative purposes only.

25

Fidelitys ETF Tools and Resources

ETF/ETP ResearchLanding Page
Quickly start a screen using the 4
available tabs:

Geography/Region

Country

Sector, or

Asset Class

The landing page has a variety

of tools and resources available:
For example, you can quickly:

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Track the market

Locate an ETP by holdings

Read expert ideas

View the top ten ETPs

For illustrative purposes only.

Fidelitys ETF Tools and Resources

ETF/ETP Research Highlights

ETF Screener and Market Tracker

Find ETFs by Basket Holdings
Top 10 ETP Lists
ETF Education and 3rd Party Research
& Commentary
ETF Portfolio Builder

27

Fidelitys ETF Tools and Resources

Live Support

You Have Access to Even More Resources

CALL

VISIT

800.544.5115
to speak with one of
our knowledgeable
representatives

a Fidelity Investor
Center
for a consultation with
one of our investment
professionals

Tell us how we can help you today.

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Important Information
Diversification does not ensure a profit or guarantee against loss.
Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market,
or economic developments.
Free commission offer applies to online purchases of Fidelity ETFs and select iShares ETFs in a Fidelity brokerage account which
may require a minimum opening balance of $2,500. The sale of ETFs is subject to an activity assessment fee (from $0.01 to $0.03 per
$1,000 of principal). iShares ETFs and Fidelity ETFs are subject to a short-term trading fee by Fidelity if held less than 30 days.
Exchange-traded products (ETPs) are subject to market volatility and the risks of their underlying securities, which may include the risks
associated with investing in smaller companies, foreign securities, commodities, and fixed income investments. Foreign securities are subject to
interest rate, currency-exchange rate, economic, and political risks, all of which are magnified in emerging markets. Exchange-traded products
(ETPs) that target a small universe of securities, such as a specific region or market sector, are generally subject to greater market volatility, as
well as to the specific risks associated with that sector, region, or other focus. ETPs that use derivatives, leverage, or complex investment
strategies are subject to additional risks. The return of an index ETP is usually different from that of the index it tracks because of fees,
expenses, and tracking error. An ETP may trade at a premium or discount to its net asset value (NAV) (or indicative value in the case of
exchange-traded notes). Each ETP has a unique risk profile, which is detailed in its prospectus, offering circular, or similar material, which
should be considered carefully when making investment decisions.
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses.
Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually
redeemed from the fund.
The S&P 500 Index is a market capitalizationweighted index of 500 common stocks chosen for market size, liquidity, and industry group
representation to represent U.S. equity performance.

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Important Information
The percentage of fund assets used to pay for operating expenses and management fees, including 12b-1 fees, administrative fees, and all
other asset-based costs incurred by the fund, except brokerage costs. Fund expenses are reflected in the fund's NAV. Sales charges are not
included in the expense ratio.
Because of their narrow focus, sector funds tend to be more volatile than funds that diversify across many sectors and companies.
Nondiversified sector funds may have additional volatility because they can invest a significant portion of assets in securities of a small number
of individual issuers.
Because FMR concentrates the funds investments in a particular industry, the funds performance could depend heavily on the performance of
that industry and could be more volatile than the performance of less concentrated funds and the market as a whole.
The funds are considered nondiversified and can invest a greater portion of assets in securities of individual issuers than a diversified fund; thus
changes in the market value of a single investment could cause greater fluctuations in share price than would occur in a more diversified fund.

Before investing in any mutual fund or exchange-traded fund, you should consider its investment objectives,
risks, charges, and expenses. Contact Fidelity for a prospectus, offering circular, or, if available, a summary
prospectus containing this information. Read it carefully.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
733779.1.0

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