This magazine focuses on an asset class that has recently established itself as a front-runner in many individuals’ portfolio choices. We look at why <a> Exchange Traded Funds (ETFs) </a> have become increasingly popular, what intrinsically they are, and how you can find out more and invest in them.

1. December 2012
An introductory guide to
Exchange
Traded Funds

2. WELCOME
W
elcome to our special one-off magazine, income from them may go down as well as up and you
Exchange Traded, which focuses on an asset may not get back the original amount you invested. If you
class that has recently established itself as a are unsure whether an investment is right for you, you
front-runner in many individuals’ portfolio choices. should seek professional advice. Different ETFs may have
We look at why Exchange Traded Funds (ETFs) have specific risks, so make sure that the investment that you
become increasingly popular, what intrinsically they are, choose matches the level of risk you wish to take. Before
and how you can find out more and invest in them. investing make sure that you understand the associated
documentation such as key features, risk factors, important
ETFs are index tracking funds that are traded on an
information and product brochures.
exchange such as the London Stock Exchange. They
combine the ready-made diversification of unit trusts with Our guest journalist, David Stevenson, explains how ETFs
the simplicity of shares. The majority of ETFs are eligible are structured, breaking them down into simple terms with
for ISAs and attract no stamp duty. ETFs have some of the his straightforward analysis, and later on examines the rise
lowest annual charges of all collective investment schemes. of ETFs and their background. Our round table discussion
But remember as with any investments the value and the reveals the various strategies surrounding investment, with
4 How ETFs are structured 14 Exchange Traded round table
in this 4 How ETFs are structured – the world of
synthetics – David Stevenson examines the
risks underlying ETFs.
issue: 9 The Exchange Traded Top 20s – Funds Alliance
Trust Savings customers have been buying.
10 Growth prospects in emerging markets –
HSBC’s view of which markets to focus on
12 How to buy an ETF or ETC with Alliance
Trust Savings – Garry Mcluckie gives a step
by step guide.

3. helpful insight direct from investment professionals.
Guest experts provide their views in feature articles from
HSBC, Deutsche Bank and Invesco PowerShares, whilst
our article gives you the practicalities of investing in
ETFs – a “how to” guide.
I hope you enjoy this ETF special edition, and would
like to hear from you about any other products or
developments you would like further information
about. Please send any feedback or suggestions to
marketingresponses@alliancetrust.co.uk
Garry McLuckie
Marketing Director
Alliance Trust Savings
20 Dynamic asset allocation 24 The ETF Boom
14 Exchange Traded round table – a discussion
about ETFs with our panel of experts.
20 Dynamic asset allocation – Manooj Mistry Alliance Trust Savings Limited
of Deutsche Bank talks about the choices
PO Box 164,
available with ETFs.
8 West Marketgait
22 The Power of Fundamentals – Ravinder Azad Dundee DD1 9YP
of Invesco reviews the stock markets.
Tel +44 (0)1382 573737
24 The ETF Boom – David Stevenson gives an Fax +44 (0)1382 321183
overview of the ETF market. Email contact@alliancetrust.co.uk
Web www.alliancetrustsavings.co.uk

4. 4 EXCHANGE TRADED | How ETFs are Structured
Over the past decade a
quiet revolution has
ripped through the
normally fairly placid
world of investment.
How ETFs are
structured
I
n the good old days, investors
David Stevenson is a financial
journalist and media entrepreneur. looking to buy exposure to a major
He writes the Adventurous Investor market like the FTSE 100 or the
column for the weekend Financial
Times and the Contrarian column for American S&P 500 had two simple choices –
industry newspaper Investment Week. buy an actively managed fund that invested
He’s also a regular contributor to the
in the companies in this index, or buy the
Investors Chronicle and has written
a number of books on investing for actual companies in the index as individual
the FT and Prentice Hall including stocks. Plenty of investors have continued to
the main reference book on ETFs.
stick with this traditional style of investing
David was also a senior producer
but a much cheaper and hugely popular
in television – working on a
range of programmes at the BBC alternative (in the USA at least) has emerged
including The Money Programme in recent years. This consists of investing in
and Tomorrow’s World - before
David Stevenson setting up the successful corporate a fund that ‘tracks’ a major index such as the
Investment Columnist communications agency The Rocket FTSE 100 or S&P 500. The actual tracking –
Financial Times Science Group. He’s now a partner in
as we’ll discover - is very simple to
the web TV platform Watering Hole
and is involved with helping media understand and involves the ‘fund’ manager
companies raise funding through the (for it is a fund) buying the long list of
Coalition Partners investment group.
In whatever spare time he has left, constituent stocks in the index.
David is also a magistrate and he even
finds time to edit his own investment The actual structure of the resulting fund will
newsletter called PortfolioReview. vary enormously with the big choice being
between an unlisted, traditional unit trust or a

5. How ETFs are Structured | EXCHANGE TRADED 5
London stock market listed exchange traded
fund (also known as an ETF). Just to confuse
an ETF is like anything else in the world of
investment – there are some specific risks which
“Whatever fund
matters there are other fund and product we’ll talk about later in this article but also some structure you
structures with even more exotic acronyms big positives, namely lower cost, and doing away
which we’ll examine in a later article but for with the risk of trusting a fund manager to make
choose, as an
our purposes they are all simply ‘index tracking’ lots of (hopefully profitable) trading decisions. investor you are
funds of one shape or another. More and more investors here in the UK are
choosing to make use of ETFs and other index simply ‘buying
Whatever fund structure you choose, as an
investor you are simply ‘buying the market’
tracking funds as part of their diversified
portfolios. The key is to understand exactly
the market’ via
via an index. When compared to a traditional
‘active’ fund manager such as an investment
what you are buying into. an index.”
trust there are three big differences.
Investing in the FTSE 100 Index
The first and most important is that you’ve
decided to dispense with the services of a fund Let’s imagine that you have decided to invest in
manager who will actively manage your the world’s leading blue chip equity index, which
investments based on their own views about is the American Standard and Poors 500 index.
the relative risks and rewards of a company in For whatever strategic reason you’ve decided
an index such as the FTSE 100 or S&P 500. That that this benchmark index gives you the right
opens up the investor in an index tracking fund exposure to the world’s leading, profit making
to a very specific risk which is that the index companies. You’d thought about investing in
the big stocks within the index – outfits like
they are tracking might be full of absolute junk
Apple and Exxon – but you decided that you
i.e. over-priced stocks that the market has
wanted more diversification and didn’t want to
chased up in value to ridiculous prices.
take the risk of picking the wrong stocks.
But in dispensing with the services of an active
Which ETF to invest in? There are, as you can
fund manager, our ETF investor has also avoided
imagine, dozens of S&P 500 trackers, issued by
a big risk, which is that the active fund manager
a multitude of large banks and fund
has made wrong decisions about the companies
management groups. You decide – for right or
they pick. Academics have endlessly studied fund
wrong – to invest in the biggest of them all, in
manager returns over the last 50 years and
fact probably the largest ETF on the planet.
they’ve concluded that most fund managers don’t
outperform the ‘benchmark index’ such as the This is an American listed ETF with the
FTSE 100 and the S&P 500. With index tracking New York ticker SPY and it is managed by
funds you are simply buying whatever the wider a huge fund management company called
market is choosing to buy (as measured by an State Street.
index) and doing away with the ‘idiosyncratic’
risks of opting for an active fund manager.
What’s inside the ETF?
Last but by no means least by investing in a
What does the fund actually invest in? As you
fund that is passively managed (we use the term
might expect, SPY invests in the constituents of
passive because there is no active fund manager
the S&P 500 benchmark US index. In the table
but simply a plan to methodically buy whatever
below State Street has listed the top ten
is in an index) you are cutting your costs very
holdings within the index tracking fund, with
substantially. Many investment trusts still charge
familiar names such as Apple, Exxon and
more than 1% per annum for their active
Microsoft topping the list. Needless to say there
management, whilst more than a few unit trusts
are another 490 stocks above and beyond these
charge well over 1.5% per annum. ETFs and
top ten holdings. You’ll also see that against
index tracking unit trust funds rarely ever charge
company is its weight within the index – in the
more than 1% per annum, with most charging a
SPY fund, shares in Apple comprises 4.8% of
good deal less than 0.5%. That extra 1% of costs
the total value of the fund. If we were to look at
charged by active managers can add up to a
the composition of the index, there would be
huge amount over 10 or 20 years.
almost no difference whatsoever – the contents
What should become apparent is that the of the ETF would track (almost perfectly) the
decision to invest in an index tracking fund like composition of the index.

6. 6 EXCHANGE TRADED | How ETFs are Structured
“...we might Top fund holdings in SPY index tracker* Physical tracking or replication is fine if one is
tracking a very broad, very liquid, well known
begin to start Name Weight (%)
index such as the S&P 500 or the FTSE 100.
Apple 4.80% These indices contain dozens of well known
worrying about Exxon Mobil 3.20% names traded in the world’s leading equity
something Microsoft
International Business Machines
1.80%
1.79%
markets, where there are literally tens of
thousands of professional institutions
called the Chevron Group 1.73% operating on a real time basis.
General Electric 1.73%
tracking AT&T 1.68%
But some indices aren’t quite as liquid, or
‘efficient’. These indices might track, for
error...” Johnson & Johnson 1.46%
instance, Indian equities or track a very
Procter & Gamble 1.43%
Wells Fargo & Co 1.43%
specialised bit of the UK mainstream equity
space such as small cap emerging market
* As of 21/8/2012
stocks that pay a high yield. Within these
specialised indices there may be all manner
Understanding the tracking structure of complications – for whatever reason,
physically tracking a specialist index might
How do the ‘passive’ managers of this fund pull
be a tad more complicated than tracking the
off this tracking? The simple answer is that they
FTSE 100. This needn’t prevent a fund
use lots of computing power to make sure that
provider from setting up a physical index
they constantly track the index via their fund,
tracking fund, but their management costs
plus an active trading desk. If the price of a stock
might be a little higher. Also we might
declines by 10% in value on one day, bringing
begin to start worrying about something
its weighting within the index down from say
called the tracking error.
4.85% to say 4.4%, the fund managers at an ETF
sell their holdings of this stock to make up the This complex sounding term is actually
difference – and vice versa. The key to this very simple to understand as it involves
particular index is that the managers are measuring the returns from the underlying
physically replicating the index i.e. if it says it’s index against the returns from the fund. In
in the index, the fund managers make sure that some cases a big difference of as much as 1% a
those actual physical shares are in the fund. That year might emerge. There are many reasons
physical tracking is the norm in the US market why this tracking error might emerge, not least
and is very common here in the UK. those bigger management fees, but the net
effect can be drastic. Imagine if your ETF was
tracking an index and was supposed to have
The synthetic tracker alternative returned 5% last year but the fund actually
But there is a newer alternative which involves only returned 3.5% – in this example our
a novel twist, called the synthetic tracker. tracking error is 1.5%.

7. How ETFs are Structured | EXCHANGE TRADED 7
How does a Synthetic Tracker work? Behind the scenes the value of the swap and the
associated collateral backing up this return has
“As an investor
All this talk of tracking error and less liquid
indices has spawned a rival to the physical
simply increased from a total of £100m you need to
(probably comprising £90m in collateral and a
replicating index tracking fund. This is called
£10m swap contract) to £110m (£99m in
balance the
the synthetic tracker fund and in essence
there is just one crucial change.
collateral and £11m swap contract). The beauty potential
of this synthetic tracking is that there need be
A synthetic tracker fund following the FTSE no tracking error whatsoever and the issuer can reward of
100, for instance, might do everything the also underwrite to pay out the total net return
including dividends (once tax has been
lower tracking
same as its peer which uses physical tracking
(or replication) but with the synthetic fund, accounted for). Costs might also be substantially errors, access
its core holdings won’t be the stocks inside lower as a result and crucially, this synthetic
the actual index but what is essentially an swap is very efficient in dealing with less liquid to new markets
IOU. The issuer might be a large investment markets such as Indian equities. and lower
bank that already holds all those stocks within
the S&P 500 as part of its normal trading
The downside of a synthetic tracker should be
immediately obvious. The investor is taking a
expenses with
portfolio. The bank’s trading desk simply
issues an IOU to the fund which says that
risk with that IOU. It is in essence a gamble on the downside
the credit worthiness of the bank issuer, which
they’ll promise to pay out on the return from
introduces the concept of ‘counterparty risk’.
of counterparty
investing in the index. As collateral they’ll
issue what is called a swap (a kind of
The bank will do its utmost to mitigate that risk risk.”
for you, by offering up that collateral. The
complicated IOU) which is that promise
regulators will also probably force the bank and
(measured against the return from the index)
the issuer to limit that exposure to the swap
as well as collateral to back up the promise or
contract to 10% at most of the value of the fund.
‘contract’. That collateral can come in many
But there is no getting away from the fact you
different shapes and sizes and could be
are taking a risk. As an investor you need to
whatever stock the bank holds within its
balance the potential reward of lower tracking
trading portfolios at the time.
errors, access to new markets and lower expenses
How does this IOU work? For argument’s sake with the downside of counterparty risk. The
let’s imagine that our synthetic tracker is debate between physical and synthetic tracking
following the FTSE 100 over the next year. The has become very heated in recent years and
fund starts with a market cap of £100m when many investors have what can seem like an
the FTSE 100 index is at 5,000. One year later irrational distrust of synthetic ETFs. There are
the index has gone up by 10% and the index pluses and minuses for both forms of tracking –
level is now 5,500. Our fund should now be investors simply need to understand the risks
valued at £110m. and make a considered judgement.

8. 8 EXCHANGE TRADED | How ETFs are Structured
Your checklist for using ETFs “It’s important to note
Is it an exchange traded fund or a that this stock lending is
unit trust?
carefully managed and
This is perhaps the most basic issue for many
private investors. Most of the index tracking
monitored – you need to
funds on offer are shares based funds that are make your own decision
‘listed’ on an exchange, and thus the acronym
used to describe them starts with an E, as in if you are happy with
exchange. That means you’ve got to buy and
sell through a stockbroker, who can deal in
the procedures and the
real time – although there will also be a bid collateral on offer.”
offer spread between the asking and selling
price. Many investors don’t have accounts
with stockbrokers but use an adviser who actually own. The borrower of stocks and
might not even have access to a dealing bonds in an iShares ETF portfolio will
platform. If this is the case they’ll probably obviously have to pay a fee for the duration of
use an index tracking unit trust fund or OEIC the loan. They’ll also lodge ‘collateral’ in
where the fund is structured in almost exactly return which can amount to as much as 145%
the same way as an exchange traded fund but of the value of the loan in some isolated cases
with dealing on a daily basis. and more than 100% of the value of the loan
in nearly all other cases.
Counterparty risk – how big a problem is it?
Stock lending is a perfectly acceptable practice
Exchange traded notes and certificates have – many actively managed funds also engage in
an obvious risk – they are in effect an IOU securities lending – nevertheless there is still
by a large financial institution, a form of potential for concern with this stock lending.
securitised derivative. But that risk can also What happens if the borrower of shares in the
be overstated and can blind investors to the fund goes bust? How easy will it be to grab
advantages of using synthetic replication. back and sell any collateral offered up by that
Investors also need to remember that all borrower? Yet it’s also important to note that
listed products – funds, notes and certificates this stock lending is carefully managed and
– are not covered by the Financial Services monitored – you need to make your own
Compensation Scheme (FSCS). Invest in decision if you are happy with the procedures
any exchange traded fund at your own risk – and the collateral on offer.
the government will not bail you out.
How liquid is the ETF?
Stock Lending activity – how much goes
ETFs have become very popular in
on and who benefits?
Europe, with trading volumes exploding in
If you do invest in a physical tracker you’ll recent years. But that liquidity can also be a
probably be confident that your counterparty curse as markets stress or liquidity seizes up.
risk is very low, as your fund manager owns Markets-makers may choose to expand the bid
that big basket of shares you are tracking. But offer spread on lightly traded ETFs to
there is another risk that you need to be aware unacceptable levels – these spikes in bid offer
of based around something called stock spreads can also move around on an intra day
lending. Those physical baskets of liquid trading basis. These excessive bid offer spreads
assets represent a real opportunity for a also point to a bigger challenge – exchange
sophisticated organization like iShares and traded products of all shapes and sizes may be
its parent Blackrock – why not lend out the the big new thing in Europe but that listing
share and bond certificates within its portfolio activity hasn’t always translated through into
for limited periods of time to external actual ‘action‘ on exchange – many European
organizations who might to borrow them? ETFs, for instance, boast low Average Daily
Volume (ADV) numbers.
The ‘borrowers’ are likely to be hedge funds
or bank trading desks who might have a
particular view on a company (bearish or Opinions expressed are those of David Stevenson, not
bullish) and want to make a quick profit by Alliance Trust Savings Limited. Please read the
speculating on stocks and bonds they don’t important information at the end of this publication.

9. Top 20s | EXCHANGE TRADED 9
EXCHANGE
Traded Funds Top 20s
T
ake a look at which Exchange Traded Funds Alliance Trust Savings customers bought
between 1 January 2012 and 31 October 2012.
Rank Asset
1. iShares FTSE 100
2. ETFS Physical Gold
3. iShares S&P 500
4. ETFS FTSE 100 Super Short Strategy
5. iShares Markit iBoxx Corporate Bond Ex Financials
6. iShares Index Linked Gilts
7. iShares Markit iBoxx Euro Corporate Bond
8. iShares Markit iBoxx £ Corporate Bond
9. iShares Physical Gold
10. iShares treasury Bond 1-3
11. db X-trackers FTSE 100 Short Daily
12. iShares Dow Jones Emerging Markets Select Dividend
13. iShares $ Emerging Markets Bond
14. ETFS Physical Silver
15. iShares FTSE UK All Stocks Gilt
16. iShares FTSE 250
17. iShares FTSE UK Dividend Plus
18. db X-trackers MSCI AC Asia ex-Japan
19. SPDR Euro S&P $ Dividend Aristocrats
20. SPDR Euro S&P £ Dividend Aristocrats
The table confirms the purchases of investors at that time; no reliance should be placed on the position
of any company in making any investment decisions. The rankings are based on the value of all
purchases made by Alliance Trust Savings customers in the Select SIPP, ISA and Investment Dealing
Account. Alliance Trust Savings does not provide advice. If there are any terms you are unfamiliar with
or you are unsure of, you may wish to seek financial advice.

10. 10 EXCHANGE TRADED | HSBC Global Asset Management
Growth prospects in
markets are still stro
which markets to
At a time when developed
A
t a broader level, emerging nations have undoubtedly
risen like a phoenix from the ashes of their own disasters,
market countries seem to such as the Russian financial crisis of 1998. Today,
be forever embroiled in emerging markets are the engine of global growth; while Western
economies stagnate, countries such as Brazil, Russia, India and
debt crises, hindered by
China (termed BRICs) continue to grow. At HSBC, we believe that
lacklustre economic data these economies are likely to be the driving force of the new global
and beset by volatile equity economy. In our opinion, they offer attractive investment
opportunities, for the following reasons.
markets, the emerging
First of all, the BRIC economies have, to varying degrees, shown
market bloc continues rapid economic growth, increasing market size across all sectors.
to show remarkable They also have a burgeoning middle class, providing a rich source
of potential consumption. Each of the BRIC countries also has
resilience. In truth, a new
multiple and different attributes and, thus, each is distinct.
world order seems now
Brazil, the fifth-largest country by area and population in the
to be forming, with the US, world, has a wealth of mineral reserves and a focus on energy
once the undisputed king resources, commodities and agriculture.
of the global economy, Russia is the world’s largest country in terms of territory, with a
consumer market of over 140 million people, vast natural
seeing its crown being resources, a highly educated workforce, and technologically
slowly usurped by China. advanced research and production capabilities.

11. HSBC Global Asset Management | EXCHANGE TRADED 11
India has the second-largest population in the world with The four countries also complement each
a young and vibrant workforce. The Indian economy benefits other. China, as one of the leading
from specialisation in services, outsourcing, technology and manufacturing countries in the world, depends
pharmaceuticals. on the importation of commodities and energy
from Brazil and Russia. Meanwhile, India
China, with 20% of the world’s population, is the most
provides the IT services that make it possible to
populous in the world and has raced up the GDP ladder in
optimise the use of new technology. The
the last decade. Indeed, China is one of the fastest-growing
continued requirement of commodities from
economies in the world with an annual growth rate in excess
Brazil and Russia will help boost the economies
of 10% over the last 30 years. In early 2011, it surpassed Japan
of both countries. Meanwhile, India and China
as the second largest economy and seems set to replace the USA
by as early as 2020. It is already the world’s largest exporter of have benefited from the recent global economic
goods and is a leading global manufacturer across a wide range crisis, as they are net importers. Overall, these
of industries, facilitated by its abundant labour resources. factors make the BRIC bloc compelling from
an investment standpoint.
n emerging
At HSBC, we have a number of products that
aim to take advantage of these opportunities.
We have recently launched a renminbi fixed
income fund, which aims to allow investors
to gain exposure to the renminbi, China’s
ong –
currency, and to benefit from its potential
appreciation via investment in the offshore
bond market.
We also believe that Russia is of particular
interest and, in July 2011, launched the first
to focus on
physically replicated Russian ETF in Europe.
ETFs are attractive as investments not only
because of their low costs, tax efficiency and
stock-like features – but also because they
provide investors with a way of tapping into less
Furthermore, BRIC countries have compelling long-term accessible markets. HSBC’s physically replicated
growth potential. The sustained growth of BRIC economies Russian ETF tracks the MSCI Russia Capped
has been based on a combination of demographic factors, Index, which represents the top 85% by market
increased industrialisation and a wealth of natural resources. capitalisation of listed companies in the Russian
The pace of growth has seen their international significance investable equity universe. The tracking of this
increase rapidly, challenging the traditional economic index ensures the ETF is highly correlated with
dominance of developed markets. Recent growth has been the Russian market. Furthermore, the fund has
driven by domestic rather than export demand, reducing so far has delivered better tracking-error
BRIC reliance on their developed markets trading partners. difference than most swap-based ETFs since its
The outlook for BRIC nations is also promising. Growth rates launch date. By harnessing all of HSBC’s
in the BRIC countries are widely expected to exceed those of capabilities, we have been able to manage both
western markets, especially China and India. Their stronger Russian equity and broader emerging market
outlook has been a key reason for the large investment ETFs on a physical and competitive basis that
inflows seen in recent years. are of high quality and good value.
This article has been issued and approved by HSBC Global Asset Management.
The value of investments and any income from them can go down as well as up and investors may not get back the amount
originally invested. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent
in some established markets. Stock market investments should be viewed as a medium to long term investment and should be held
for at least five years. The article is for information only and does not constitute investment advice or a recommendation to any
reader to buy or sell investments. The views expressed were held at the time of preparation and are subject to change without notice.

12. 12 EXCHANGE TRADED | Alliance Trust Savings
How to buy an ETF or ETC with
ALLIANCE TRUST
SAVINGS
You may be considering what the next steps are before
deciding whether or not to become an ETF/ETC investor.
T
he process really is the same as prior to By clicking on the ETF tab (see table 1), you are taken to
purchasing any investment and the key is always the main Morningstar page which contains a snapshot
do your research. Why? As well as being aware of information. This page is your ‘hub’ to access more
of the potential benefits of any investment you have to be detailed information on the ETF/ETC of your choice.
fully aware of the risks and how much risk you wish to The snapshot page is a good way of finding your feet
take. Only by conducting thorough research can you and allows you to search by category if you’re interested
make an informed decision, fully aware of the risks and in a particular sector.
understand how much risk you are willing to take of both By using the drop down menus you can look at specific
the risks and benefits of the underlying investment. ETF companies and their sectors such as Emerging
At Alliance Trust Savings we understand the value Markets or Commodities. Once you have selected a
of research in the investment decision process. We offer company you can view a particular investment by
all our customers free access to research services from simply clicking on the investment name, which will
Morningstar, a recognised player in investment research then provide access to more detailed information on
expertise and facilitation. You can access information your chosen investment. You can also use the search
from Morningstar on our website by clicking on the box and input the ETF name or Investment Symbol to
Investment Selector tab at the top of our home page and find a specific investment. Once you have selected your
then follow the instruction on that page which will take chosen investment you can view information via the
you to the tool itself, or alternatively it is available when navigation on the left hand side (see table 2).
you login securely to your account.
In the next section of this article we will look at how
In terms of ETFs and ETCs Morningstar holds a wealth you can purchase an ETF online with Alliance Trust
of information for you to consider. Savings. If you decide to purchase an ETF or ETC with
Side bar menu from table 2 (opposite)
1. Overview – Provides high level information 5. Portfolio – Includes information on market cap,
including Morningstar category, performance history, prospective earnings, dividend yield factor, historical
key stats, ISA eligibility and Inception Date. earnings growth and asset allocation. ETFs/ETCs
2. Chart – Growth of £1,000 across different invest in specific sectors and therefore asset allocation
time frames will typically be 100% equities for example within a
specific region or 100% in a specific region.
3. Performance – Performance history tracked
against an index. Also gives annual, trailing and 6. Management – Contact information of the ETF/
quarterly returns ETC provider. Domicile, Legal structure, and whether
or not the investment is a UCITs is also covered in
4. Risk and ratings – Morningstar risk rating
this section.
measured against category and return/risk analysis
7. Fees – Includes any fees and expenses that you
will incur when buying into an ETF.

13. Alliance Trust Savings | EXCHANGE TRADED 13
Alliance Trust Savings you will be asked to logging in click on the Trading Centre tab
confirm that you have read the relevant Key and then click trade now. It is important to
Investor Information Document (KIID) before note that you cannot purchase an ETF/ETC
completing the purchase. The KIID is really within the fund supermarket. If you have
useful and provides important information. The ever purchased an equity with Alliance Trust
good news is that you can access KIIDs again Savings online the process is exactly the
through the Documents tab of Morningstar. same for ETFs/ETCs.
The information contained within the KIID is
To help you we have produced a list of all
required by law to help you understand the
the ETFs/ETCs available on the Alliance
nature and the risks of investing in the ETF/
ETC. A KIID will only be provided where the Trust Savings platform and importantly the
investment is classified as a UCITs. Investment Symbol that applies as you will
need this for any purchases or sells. This
There is much more information available and full list is available within the ‘forms and
too much to cover here – Why not log into documents’ section of our website under
your account today and find out more? Formal Documents. This list will also help
you with your Morningstar Research as
How to purchase an ETF/ETC with some investments displayed on Morningstar
Alliance trust Savings are not available on our platform.
Once you have completed your investment We hope you have found this short guide to Garry Mcluckie
research and decided on which ETF/ETC to ETF/ETC research helpful. Our website has a Marketing Director
purchase the easiest way to complete your range of ‘how to videos’ one of which is about Alliance Trust Savings
purchase is online using our secure trading purchasing an ETF or ETC online – why not
platform. To purchase an ETF or ETC after check it out? Happy investing.
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His role is to manage the
1 Investment Information Alliance Trust Savings product
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2 Investment Information
Morningstar® Fund ReportTM Morningstar Tools
Overview db Physical Gold ETC XGLD The value of investments
Chart Performance History 31/10/2012 Key Stats and the income from them
Performance Growth of 1,000 (GBP) Morningstar® Category Morningstar RatingTM
Risk and Rating 1,406 Commodities – Precious
Metals
Not Rated may go down as well as
1,332
Portfolio 1,258
1,184
IMA Sector
-
ISIN
GB00B5840F36 up and you may not get
Management NAV 30/10/2012 Day Change
Fees
1,110
1,036 USD 169.81 0.64% back the original amount
962 Total Net Assets (mil) Total Expense Ration
Print
Glossary ?
2008 2009 2010 2011 2012 -
Annual Management
-
Inception Date
you invested.
Fund - - - - - 12.1 5.8
Fee 15/06/2010
+/- Cat - - - - - 15.0 3.6 0.29%
+/- Cat - - - - - - - ISA
No
Exchange Name
LONDON STOCK
If you are unsure whether an
EXCHANGE, THE
Category: Commodities – Precious Metals
Index: –
Benchmark
investment is right for you,
Trailing Returns 31/10/2012 Fund Benchmark or you are unfamiliar with
Fund +/-Idx London Fix Gold PM PR USD
YTD 5.84 -
Morningstar® Benchmark the terminology, you should
3 Years Annualized - -
-
5 Years Annualized
10 Years Annualized
-
-
-
-
seek professional advice.
12 Month Yield 0.00
Tax Year Return 15.78% Past performance is not a
guide to future performance.
Screens for illustration purposes only. Source: Morningstar

14. 14 EXCHANGE TRADED | Round Table
ROUND
TABLE
David Stevenson chairs a David: Why would ordinary
investors invest in index-tracking
discussion about Exchange funds? Why would they not go off
and invest in investment trusts or a
Traded Funds with a panel of standard unit trust?
experts: Nick Blake, Jose Garcia- Jose: I think one of the key things about the
Zarate and Manooj Mistry. philosophy behind passive investment, is
acknowledging the inability of active managers
to comply with their objectives. There are a lot
This round table event was filmed at the Tate Modern, of studies that show over the long term, that
London on 5 September 2012. To view the full discussion active managers are unlikely to fulfil their
visit alliancetrustsavings.co.uk investment objectives.

15. Round Table | EXCHANGE TRADED 15
Nick Blake Head of Retail, Vanguard
Nick Blake is Head of Retail. He is responsible for overseeing development of
Vanguards fund range for the UK and European businesses and the distribution
to our key retail audiences of Financial Planners, Wealth Managers and Asset
Management Companies. Nick joined Vanguard in 2009 after a long career with
a leading UK Life Office where he held senior positions in distribution, and more
latterly as a key member of the team delivering a successful Wrap platform.
Jose Garcia-Zarate Senior ETF Analyst, Morningstar
Jose Garcia-Zarate is a senior ETF analyst for Morningstar, covering European ETFs.
Before joining Morningstar in 2010, Jose spent seven years as a senior European
sovereign bond market strategist for 4cast, a London-based consulting firm. Prior to
4cast, he was a macroeconomic analyst and Eurozone sovereign bond markets analyst
for S&P MMS. Jose began his career as an analyst intern for Spain’s Economic Ministry,
working in the external trade department in the ministry’s USA office.
Manooj Mistry UK Head of db X-trackers, Deutsche Bank
Manooj Mistry is UK head of db X-trackers, Deutsche Bank’s exchange traded
funds (ETF) platform. Manooj joined Deutsche Bank in 2006 having previously
worked at Merrill Lynch International, where he was responsible for the
development of LDRS ETFs, the first ETFs to be launched in Europe. Manooj
graduated in economics and business finance from Brunel University.
This is not a question of actually saying that the
active managers are not good at what they do, or
If you look at it from a regulatory perspective
an ETF is the most highly regulated product,
“The challenge
that the rationale behind picking a certain stock an ETC is basically issued by a special purpose for investors
or a certain bond is not correct at the time, it’s vehicle and it trades like a security on the
basically measuring the performance over a long exchange and an Exchange Traded Note is is knowing
term period which is what investors should be typically a debt security issued by a bank.
interested in. who will beat
David: One of the most shocking the index.”
David: What should investors really things is that the average fee charged Nick Blake
focus on? by average fund in Britain is actually
going up not down over the last few
Manooj: When you look at an ETF it is
years and that’s across the entire
essentially the index-tracking fund listed on an
universe of funds, but how do ETFs or
exchange and it trades like any other listed
unit trusts compare in terms of cost?
security so in the same way as with an
investment trust you buy it on the exchange Nick: That’s the challenge for investors, it’s
through your broker you can do the same with knowing in advance who will beat the index
an exchange traded fund. From a regulatory and that’s the real challenge. Now, as to the
perspective ETFs are regulated as any other different types, certainly in our view an
OEIC or unit trust, they conform to what’s Exchange Traded Fund, an index exchange-
called the UCITS Regulations a pan-European traded fund and a mutual fund is actually the
set of regulations that govern funds across same vehicle, it’s just a different way to buy
Europe and you’ve also got the other ETPs the same exposure in that way, typically
Exchange Traded Products categories out there investors would find that an index fund or an
so you’ve got Exchange Traded Commodities ETF would typically be much lower cost than
which are known as ETCs and typically these an active fund and that’s because active funds
will give you exposure to single commodities or put a lot of effort into research trying to
a basket of gold or oil for example and then you outthink the market, trying to do the deep
also have other products called Exchange research to understand how they might
Traded Notes and these tend to be linked, once out-perform the market, an index fund isn’t
again could be linked to commodities but could trying to beat the market, it just buys for
also be linked to strategies such as volatility. example everything in the FTSE 100.

16. 16 EXCHANGE TRADED | Round Table
David: How much would Gold is purely a safe haven strategy borne
an average index-tracking out of the uncertainty in the global
one charge? economic picture and people are looking
to protect capital. It’s not so much that
Nick: The usual sort of apples and apples they’re seeking to have positive returns
comparison trouble here is that some of but at least preserve the capital and on
the active funds include commissions the fixed income space you see a lot of
and fees in them whereas many index interest in corporate bonds
funds don’t pay commission and fees
Manooj: The reason why you can offer a
but on a like for like basis an index fund
single commodity exposure to something
would typically be half a percent to
like gold is that the vehicles that the
three quarters of a percent cheaper than
products are issued by are vehicles that
an active fund in general and as you say
aren’t as regulated as funds, they are
the compound effect of those charges
regulated as special purpose vehicles
could be quite significant.
which have the opportunity to issue debt
Jose: We ran a study at Morningstar or securities linked to one asset so they’re
about the implications of high not subject to the same diversification
management fees and it is astonishing rules you have in funds.
how much of your long term returns
can be eaten away by paying David: So they’re a little bit
management fees. At 1% or 2% this riskier in their structure.
doesn’t sound like a lot, but this is
compounding year after year. Manooj: Yes but a lot of these products
for example the gold products are called a
Manooj: It’s very much like what we see whole physical – gold, tobacco products.
is that ETFs give retail investors the same
tools as institution investors have,
institution investors have been using
David: It might be safer in
passive products for many years.
some respects.
Manooj: What you typically see with an
exchange traded commodity is that gold
David: Because a lot of people
is held in a vault somewhere backing that
have pension funds, would
investment so these products are backed
pension funds make use of
by the actual gold bars sitting somewhere
index tracking?
so these products are what I would call
Jose: They do because this is one of the collateralised or asset backed they’re
key industries where you really need to physically backed by assets.
make sure that the stream of revenue is
David: And that’s a crucial thing
more or less secure and it is one of the
because when we talk about
key reasons why I think the ETF market
commodities in fact you sort of have to
is actually kicking off with some
go down that route don’t you because
important growth rates in places like
quite often they’re either physical
the UK where you have a very
holdings or they’re futures or they’re
important pension fund industry.
done on options exchanges so they can’t
be held in the traditional way that an
David: What are the kinds of equity fund would hold, you just can’t
things that people are buying do it that way can you so that’s the
out there at the moment? reason they’ve done it that way.
Jose: Well lately it’s been about a search
for yields and trying to find the safest David: What’s the big difference
investments. So, you have the fixed in this physical versus synthetic
income space gathering a lot of debate, what’s going on there?
investors’ interest, and you have a It does sound very confusing
commodity space of the ETFs. for many of us.

17. Round Table | EXCHANGE TRADED 17
Jose: I think the first thing is to define is ‘what is
a physical and what is a synthetic fund’. Physical
Regulations I mentioned earlier so as a minimum
a fund must at least have 90% assets.
“...it is
is pretty easy to understand. The fund is either
In many cases in the ETF industry many astonishing
going to hold all the components of the index or
a subset of the components of the index.
providers are actually doing what is called over
collateralisation so they’re actually assets greater
how much
Synthetic providers or synthetic ETFs deliver the
return of the indices via small contracts.
than the value of the fund so these are basically
an element of a cushion of security there.
of your long
The key difference obviously in the structure is term returns
that a synthetic ETF will always have a counter
party risk, that’s the nature of the structure
David: To the outside observer
who is used to traditional fund
can be eaten
because a counterparty, typically that is when an structuring, what are the away by high
investment bank will have to provide the return advantages of doing it this way?
of the index and there is always the risk even
Manooj: The advantages of synthetic
management
though theoretical that the bank will not be
able, for whatever reason, to provide that return.
replication or swap based replication is that you fees year after
can deliver the index performance without any
tracking error / difference. This means that you year...”
David: Manooj you do synthetic can guarantee that your returns will be the FTSE Jose Garcia-Zarate
so just talk us through how you 100 index minus the management fees.
structure a synthetic fund.
Manooj: Jose has explained the first part in terms David: And to understand the
of how the fund works, the fund is entering into a tracking error, it’s very simply an idea
contract with a bank to deliver the underlying which is that you say you’re going to
index performance then as part of that contract track the FTSE 100 and it turns in
the fund also needs to receive some physical assets 10% one year and you only turn in
so this physical collateral is there to basically offset 9%, your tracking error will be 1%.
the counter party exposure. The amount of assets Manooj: 1% yes and some of that 1% will
that need to be delivered or posted with the fund obviously be the management fee but there could
is determined by the regulations, by the UCITS be additional tracking error on top of that.

18. 18 EXCHANGE TRADED | Round Table
David: So Nick you do a physical slight tracking error and a good adviser and
approach and that sort of does what good investors really look for weighing off
it says on the biscuit tin really you those trades around counter party risk versus
buy the FTSE 100, you buy the perfect tracking.
bunch of stocks in the FTSE 100, Manooj: You can get counter party risk with
what are the advantages of that the physical replication to a certain extent
approach do you think?
Nick: Both methodologies (Synthetic and David: How does that work? I’ve
Physical) achieve the same outcome for heard things like stock lending, what’s
investors and both are covered by the European going on there? What’s that all about?
UCITS Rules. Our preferred approach is
physical, we like to own the securities and Jose: There could be counterparty risk in
deposits that are there backing up the return for physical funds.
investors. One of the challenges with physical
is, as the funds get broader, so let’s say you’re David: How does that work, surely
trying to track a more global index. if Nick has his 100 stocks, his FTSE
100 he’s got them in his safe and
David: You hear things like the he has the certificates, what’s
MSCI World. wrong with that then, what could
go wrong there?
Nick: Correct, and that might require you to
own thousands of stock. Jose: The thing that could go wrong is that if
he decides to actually lend those 100 securities
And there could be a point of inefficiency to other parties then obviously you create an
where trying to own a very small amount of a element of counterparty risk in the sense that
very obscure opportunity means it’s those other parties might not return the
inefficient for the fund manager to own that securities to the fund. Not all physical funds
so whilst most physical managers will get as engage in securities lendings but a lot do.
close as they can to the index and a really
good one will do very well there you could
start to see small amounts of tracking error
David: What’s an interesting area
out there that investors should just
occur so really the trade-off for investors here
keep an eye on, where there’s a lot
is with synthetic you get a certainty of return
of activity going on?
because you have the promised return but
have counter party risk versus no counter Manooj: I think what we’re seeing is that with
party risk with physical but potentially a ETFs retail investors have the same tools as

19. Round Table | EXCHANGE TRADED 19
institutional investors have and what we’ve
already seen is a number of institutional
broader access to these vehicles, better
disclosure, more transparency just so that
“...investors
portfolio managers using products like ETFs and investors have a far more informed way of have got far
index funds in their portfolios and they’re looking at their portfolios.
using these products to do asset allocation so
Jose: Perhaps it is the pending revolution for
more choice
rather than choosing individual stocks or
bonds, they’re actually deciding OK I want
the ETF market, the accessibility and the and, also in
extensive use of Exchange Traded Products by
exposure to a particular market or asset class.
the retail community. I think that socially the how they
Nick: The thing I’m most pleased with actually conditions are right for an increased
is not so much in the strategies themselves but participation of the retail community because index...”
more in the access that investors have to these people have to save money for things such as Nick Blake
strategies so there was a time when low cost pensions and university costs.
products wouldn’t be carried by many of the
platforms out there because quite frankly they
didn’t pay a commission being very low cost so
investors really only had the choice of some
relatively expensive funds and things like
investment trusts or ETFs or no load mutual
funds typically wouldn’t be carried but one of
the developments I’m delighted to see more This article is for information only. The views stated in the discussion are those of
forward thinking platforms like Alliance Trust the panel members at the time, and not Alliance Trust Savings Limited. Please read
are making the access to these vehicles far the important information at the end of this publication.
wider now than has ever been before so
Investments can down as well as up and capital is at risk so that investors may
investors have got far more choice and they’ve
get back less than they originally invested.
also got choice in how they index so in many
ways an ETF is just another way to index like a Investments in emerging markets may involve a higher element of risk due to less
mutual fund but how they index can also have well-regulated markets and political and economic stability. Exchange rate changes
an impact on cost as well, accessing these may cause the value of underlying overseas investments to go down as well as up.
through a stock broking platform might be a
Whilst care has been taken in compiling the transcript of the discussion, no
cheaper way to go than accessing them
representation or warranty, express or implied, is made by Alliance Trust Savings
through a traditional funds platform and
Limited as to its accuracy or completeness.
investors should think about not just the cost
of the fund itself but also the cost of ownership Nothing contained in this transcript of the discussion should be construed as
of the fund just as much because both of those being an invitation or inducement to engage in investment activity. No advice is
costs will erode their returns over time so one given by Alliance Trust Savings Limited. For advice on investing, please consult an
of the things I’m delighted to see is just the independent financial adviser.

20. 20 EXCHANGE TRADED | Deutsche Bank db X-trackers
Dynamic asset allocation
using ETFs
Investors can use ETFs to build actively managed portfolios,
or invest in a single ETF where an independent asset manager
does the active allocation for you, says Manooj Mistry, UK
head of db X-trackers, Deutsche Bank’s ETF division.
T
he traditional premise for investing in investors are happy to maintain beta exposure
an ETF is to track the performance of a at low cost through investing in ETFs. Other
market at low cost via a tightly investors, however, aim not just to track market
regulated and liquid trading instrument. As performance but to generate returns beyond
index trackers, ETFs are explicitly designed not that of the market. This type of above-market
to provide returns above those provided by the performance is known as alpha.
index. Rather, they are simply designed to be an
ETFs can also be used to pursue alpha. However,
efficient mechanism for delivering
unlike traditional pursuers of above market
to the investor the index’s risk and reward.
returns, who engage in stock and bond picking,
In investment circles, acquiring exposure to the alpha generation using ETFs is all about asset
whole market in this way is referred to as taking allocation – being in the right market at the
beta exposure. Many long-term, buy-and-hold right time, as opposed to being long the right
underlying security.
Focusing on asset allocation as the main driver
of investment performance as opposed to
company stock or bond selection constitutes a
modern alternative to the traditional asset
management approach. There is compelling
evidence to suggest this could be a good way to
generate alpha. Some academic research
suggests that the majority of the variance in
investor returns is determined by the overall
choice of asset class invested in, rather than the
individual choice of stocks or bonds. This may
help explain why most active managers do not
outperform markets consistently over time.
db X-trackers, Deutsche Bank’s ETF platform, is
the second largest ETF provider in Europe by
assets under management. With over 200 ETFs
to choose from, covering all major asset classes,
investors can use db X-trackers ETFs to put
together their own asset allocation portfolios.
As a basic example, an investor seeking a
globally diversified and asset class diversified
portfolio, but with an allocation biased towards
emerging markets, could combine long
positions in db X-trackers ETFs on the FTSE