August 2013 Vol. 7 No.

12

ETFInvestor

SM

A rational approach to asset allocation

Time-Horizon Arbitrage

Before we get to the main article, Id like to point out

that the ETFInvestor tagline has changed. I think
this new one better reflects my approach. To be rational means to be sane, in possession of all your
faculties. My main job is to keep clear-headed, even
when it hurts. Markets can be over- or undervalued
for years at a time, and even a well-executed process
can produce bad results over the short run. Often
the rational thing to do is to suffer a bit now for a lot
more gratification down the road.
To be rational also means to be guided by reason.
It implies a willingness to consider evidence and, if
the evidence warrants it, to change ones beliefs.
When I examine a strategy or fund, I look for its underlying economic intuition, and whether the evidence
speaks persuasively in favor of it, by which I mean a
record of success over many decades and in many
different countries. This approach is stringent by the
standards of typical investment analysis, but its
critical. An all-too-common mistake many investors
make is extracting too much meaning from small
data sets, which is why theyre often poleaxed when
a star manager massively underperforms or a safe
asset implodes.
Its no secret I like to dig through the finance literature. The evidence therein is of much higher quality than what youd find almost anywhere else. I admit
unless youre a bit strange, its not the most entertaining reading. (As it happens I am a bit strange,

sparing you the pain.) But the scientific method and,

by extension, the literature it spawns is one of the
best ways to acquire genuine knowledge. The great
thing about the scientific enterprise is that its always
trying to poke holes in the received wisdom, correcting itself. I happen to relish this, because I enjoy
finding the folly of crowds. It would be hypocritical
of me to not turn that lens on myself sometimes, too.
In this spirit, I try to be forthright with my readers
about my limitations and screw-ups.
Rationality implies a lot of things. It implies coolheadedness and a willingness to consider evidence,
to change ones mind, and to do so in a disciplined,
scientific manner. This is what Ive always strived for
in the newsletter. While the tagline has changed,
the underlying philosophy hasnt.
Its far better to buy a wonderful company at a
fair price than a fair company at a wonderful price.
Warren Buffett
Buffett must have had those words in mind when he
and private-equity firm 3G Capital offered to buy
out H.J. Heinz Company for a hefty 20% premium to
market value. At the time (not too long ago), consumer staples stocks were widely thought to be expensive. Eyebrows were raised, and some went as
far as to say he and 3G overpaid. A few months later,
he confounded expectations again by agreeing
to buy out NV Energy at a 23% premium, again when
the consensus was (and still is) that utilities
were expensive.
Buffett learned from Benjamin Graham that all assets
have an intrinsic value, and the goal of the intelligent investor is to buy assets at a substantial discount
Continued on Next Page

Samuel Lee, Editor

Portfolios 4
Nothing New
Lessons From History
Bad Times

News 8
Flight to Quality
Fund Analysis
10
iShares MSCI Mexico Capped
Fund Analysis
12
iShares MSCI USA Quality Factor
Finance 14
Factor Models: A Primer
Watchlist 18
Exchange-Traded Notes
Still Risky

31

Time-Horizon Arbritrage
Continued From Front Cover

Contact Samuel Lee

samuel.lee@morningstar.com
312.244.7015.

to it, with a margin of safety. Its clear Buffetts estimates of Heinzs and NV Energys intrinsic values
were substantially higher than the markets.
I think many observers were surprised because they
associate Buffett with value investing, commonly
defined as buying statistically cheap stocks. Rather,
Buffett tries to buy assets at substantial discounts
to intrinsic value, regardless of whether that value is
crystallized in current assets or yet-to-be-realized
future earnings. In my opinion, this is a better definition of value investingcall it intrinsic value investing.
For the past few decades Buffett has favored the future earnings side of the intrinsic value calculus
thanks to the influence of his partner, Charlie Munger.
If you have to lump the duo into one of the commonly
accepted styles of investing, Buffett and Munger are
best described as quality or growth-at-a-reasonable-price investors.
Both Buffett and Munger declare their favorite holding period is forever. This seems to contradict the
fact that at a high enough price, even the most wonderful business in the world will produce less-thanwonderful returns. No doubt part of their hesitance to
sell wonderful businesses at any price reflects a philosophical aversion to gin rummy investing. I think,
though, the main reason they hold on is because they
truly believe wonderful businesses are persistently
undervalued by the market, even when common valuation metrics suggest otherwise.
This suggests to me that much of Buffett and Mungers edge rests in the ability to engage in timehorizon arbitrage: buying assets with long-term value
underappreciated by the market.
Of course, many managers claim they take the long
view, bypassing Wall Streets quarterly earnings game.
It sounds great in theory, but the nature of the investment-management industry makes timehorizon arbitrage nearly impossible. Few managers
can live through more than a few years of massive
underperformance. Beyond 10 years? Forget it. Youve
long since been fired.

This is a critical flaw of the investment-management

industry, because the real value of most firms is
not in their next 10 years of earnings, but the 20 years
after that. The real time arbitrage is beyond what
most investors can stomach.
Time and Value
If we had a crystal ball that could reveal true intrinsic
value, its virtually certain we would see many stocks
are either substantially overvalued or undervalued
relative to current market prices. It would be a lucky
coincidence if a stock traded right at its fair value.
The goal of the long-term investor is to come up with
better estimates of intrinsic value than the market
and buy stocks trading for below intrinsic value and
sell stocks trading above it.

However, if you plug in reasonable-seeming numbers,

you quickly discover that the majority of an investments present value is often embodied in the cash
flows many years out. After inflation, the U.S. stock
market has returned about 7% and grown per-share
earnings by 2% over the past century. Apply a 7%
discount rate to an earnings stream growing by 2%
per annum in perpetuity, and youll find that the
earnings beyond the first five years account for almost
80% of intrinsic value. Earnings beyond 10 years
account for more than 60%.
Even if you increase the discount rate to 10%, lessening the value of future dollars, about half of the
assets intrinsic value is determined by earnings generated more than 10 years into the future.
Imagine a professional investor coming up with intelligent predictions as to what a stock will be earning
10 and 20 years from now. Not only is this difficult to
do, its nearly impossible to act on when you do it
correctly, because a few years of underperforming
your peers (no matter how stupidly theyre behaving) is a good way to lose all your clients. As a result,
many analysts use higher discount rates to make
the next few years of earnings matter more. By doing
this, theyre largely betting on how earnings surprises
will evolve over the next few years. The discountedcash-flow framework becomes more a tool for longerterm speculation.

Morningstar ETFInvestor

The Value of Moats

Buffett inverts the solution, making far-flung future
earnings the most important thing. He looks for
firms with economic moats, sustainable competitive
advantages that allow them to endure and thrive in
spite of capitalisms tendency to creative destruction.
The moat enables Buffett to do something that, on
its face, seems insane: He uses the long-term U.S.
Treasury rate to discount future cash flows (though I
doubt hes actually plugging todays ultralow rates
into his intrinsic value calculations). The only way to
justify using such a low discount rate is to be absolutely certain that a firm will be around decades from
now and thriving.

It turns out that a company with a genuine moat is

so valuable that if you can identify one with certainty,
you should be willing to pay seemingly silly prices
to own it.
For a brief spell, Americans did just that. In the early
1970s, they were taken with the idea of high-quality,
stable companies that could be bought and held
forever, regardless of price. The Nifty Fifty had long
histories of uninterrupted dividend growth and
hefty market capitalizations. According to Jeremy
Siegel, they had an average price/earnings ratio
of 41.9 in 1972, more than double the S&P 500s 18.9.
Then they crashed, and their valuations fell to more
pedestrian levels. For decades the Nifty Fifty became
just another cautionary tale of the madness of crowds.
In 1998, Siegel revisited the Nifty Fifty 1. It turns out
that buying and holding an equally weighted portfolio
from the manias peak would have returned 12.5%
annualized from 1972 to 1998, only a hair under the
S& P 500s return. With hindsight, the lofty valuations didnt turn out to be so mad.
Siegel computed the warranted P/Es of the Nifty
Fifty stocks if investors had perfect foresight. Philip
Morris (now Altria) MO deserved a 68.5 P/E but
traded at only 24. Coca-Cola KO deserved 82.3 but
traded at only 46.4, and so on.

August 2013

The biggest disappointments were technology firms.

Xerox XRX, Polaroid, Eastman Kodak, Texas Instruments TXN, and Digital Equipment Corporation were
all big losers. Without them the Nifty Fifty would
have handily beaten the market.
Ironically, the Nifty Fifty phenomenon can be seen as
a bout of temporary rationality brought on by mania.
Yes, some stocks are so good that they deserve to be
bought at what look like rich pricesprovided youre
willing to own them forever. The real task is identifying those stocks in the first place and then ignoring
all the noise. The former is nowhere near as hard as
the latter. Taking the long view can be excruciatingly
hard at times, and for that reason wide moats will
almost always be undervalued.
Mungers genius was figuring this out before nearly
everyone else. Buffetts genius was listening to
him and following through, enduring the long, lonely
periods when the market was telling him he was
a fool.
1

Jeremy Siegel. Valuing Growth Stocks: Revisiting the Nifty Fifty.

AAII Journal, 1998.

Nothing New

future returns; very few people are, and I assure you

theyre not writing down their insights for mass
consumption. Most prognosticators who claim to be
able to make sense of it all are far better yarnspinners than investors.

ETFInvestor Portfolios | Samuel Lee

Most months, nothing really interesting happens to

our positions. This has been one of those months.
Sure, theres always some piece of economic or political news coming out that causes the needle to
twitch. Such news is almost always irrelevant to the
long-term investor. As I wrote in this months cover
story (Time-Horizon Arbitrage), most of the markets
intrinsic value is tied to cash flows more than 10
years out.

Fortunately, you dont need to make sense of it all to

obtain satisfactory results. The things that matter
are simple. Are we buying things at sensible prices?
Are we keeping a lid on commissions, advisory fees,
and taxes? Are we adequately diversified? (I enjoy
delving into more-sophisticated topics, but theyre
like the cherry on top of a rich dessert rather than the
main course.) Its hard to mess up a simple, diversified, low-cost, buy-and-hold portfolio.
From what Ive seen, far too many newsletters
deviate from these common-sense principles. Why?
Because investors want fast profits and excitement,

Ill be the first to admit I am not particularly skilled

in reading the markets entrails to divine its near-

Income Portfolio
ETF Snapshot

Portfolio Allocation

Price $

Price $

Price/Fair
Value

Financial Select Sector SPDR

20.49

1.01

iShares Gold Trust

12.75

iShares MSCI EAFE Min Volatility

TTM
Yield %

1.51

1 Current

Returns (%)

Allocation %

Date First
Recommd

Avg. Cost
Basis $

Since
Recommd

12-Mo
Return

YTD
Return

5.11

6/14/13

19.73

3.85

39.56

25.88

3.95

2/8/13

16.27

-21.63

-19.73

-22.06

59.9

2.2

10.58

10/1/12

54.57

9.77

15.83

12.17

iShares MSCI Emerging Mkt Min Vol Index

57.68

1.76

9.76

10/1/12

57.15

0.93

5.41

-2.51

PIMCO 0-5 Year Hi Yld Corp Bond Idx ETF

104.28

4.76

14.06

10/1/12

101.7

2.54

8.65

4.12

PIMCO Total Return ETF

105.76

2.27

30.23

10/1/12

108.77

-2.77

2.1

-1.56

2.69

11.24

10/1/12

28.17

15.16

19.5

19.24

4.15

2.34

10/1/12

54.48

-8.92

-3.28

-9.94

PowerShares S&P 500 Low Volatility

32.44

WisdomTree Emerging Markets Equity Inc

49.62

1.06

Cash Holdings

12.71

Weighted Average

1.04

Portfolio Style %

Sector Weighting %

Val Blnd Grth

Sector

29 30 22

Lrg

11

Med

Sm

1 51100
1 2650
1 1125
1 010

Market Style %
Val Blnd Grth

26 26 25

Lrg

Med

Sm

1 51100
1 2650
1 1125
1 010

r
t
y
u

Basic Materials
Consumer Cyclical
Financial Services
Real Estate

i Communication Services
o Energy
p Industrials
a Technology
s Consumer Defensive
d Health Care
f Utilities

2.24
Performance

Portfolio Market
Weighting Weighting 1/2

4
5
26
6

7
11
18
4

-3
-6
8
2

8
4
9
3

5
9
11
12

3
-5
-2
-9

14
8
13

10
10
3

4
-2
10

Trailing Returns %

Since
1-Mo
YTD
12-Mo
Incep2

Income Portfolio
30-Day T-Bill + 5%

0.4
0.4

0.5
3.3

NA
NA

2.9
4.7

What is the ETF Income Portfolio? This portfolio targets a return of 5% in excess
of the 30-day T-bill rate over a full business cycle, with the least risk possible.
It favors high-yield opportunities with improving fundamentals. In addition, it will
attempt to hedge against inflation, disinflation, recession and growth, a riskparity approach. Tracking error to conventional benchmarks will be significant.
Who should invest in the ETF Income Portfolio? This portfolio is suitable for
income-seeking investors who are comfortable deviating from the markets returns
for long periods. It will not seek the highest yields possible at all times; at times
it will shift to lower-yielding investments, or even cash, if valuations do not offer
enough reward for the risk borne. It will be a relatively low turnover strategy.
1

Current allocation reflects change in fund values since original recommendation.

Portfolio Inception: Oct. 1, 2012. Data through August 5, 2013.

Morningstar ETFInvestor

Sign up for Buy & Sell Alerts:

https://etf.morningstar.com/
ManageAccount.
aspx?session=alerts

and theyre all too willing to give up their skepticism

because someone promises them the easy way
out. What investors desire, entrepreneurs will provide
in spades.

August 2013

nately, my father enjoys speculating in stocks too

much to buy index funds.) I also promise most of my
wealth is tied to the strategies I publish.
One change I will be making in my personal accounts
is to increase the portion of my wealth dedicated
to the Income and Asset-Allocation Portfolios. While I
already have a lot of money in them, my 401(k), dedicated to a version of the Global Momentum Strategy
based on mutual funds, has swollen to the point
where its now a bigger chunk of my portfolio than the
ETF portfolios. By the time the print edition of this
newsletter reaches your mailbox, I plan to own a portfolio split 2:1 between the Asset-Allocation and
Income portfolios with a small slice dedicated to the
Global Momentum Strategy, not counting my stake
in Berkshire Hathaway BRK.B (which makes up

This may be why the newsletter business is rife with

oily salesmen and mountebanks, the dregs of the
investment counsel industry. The barriers to entry are
low. If someone tried to launch a mutual fund based
on, say, astrology, theyd be laughed out of town, but
apparently several scribblers have proved that someone can base a newsletter on such a premise and
make a living.
My goal is different. I dont promise high returns and
little risk. However, I do promise to write a newsletter that Id want to read were I in your place, one
that Id proudly hand to a family member. (Unfortu-

Continued on Next Page

Asset-Allocation Portfolio
ETF Snapshot

Portfolio Allocation

Price $

Price $

Price/Fair
Value

Financial Select Sector SPDR

20.49

1.01

iShares MSCI Emerging Mkt Min Vol Index

57.68

PIMCO Total Return ETF

105.76

TTM
Yield %

1 Current

Returns (%)

Allocation %

Date First
Recommd

Avg. Cost
Basis $

Since
Recommd

12-Mo
Return

YTD
Return

1.51

5.09

6/14/13

19.69

4.06

39.56

25.88

1.76

9.29

10/1/12

57.15

0.93

5.41

-2.51

2.27

23.43

10/1/12

108.89

-2.87

2.1

-1.56

32.44

1.06

2.69

10.34

10/1/12

28.17

15.16

19.5

19.24

Vanguard Dividend Appreciation ETF

70.1

1.01

2.09

10.82

10/1/12

59.68

17.46

21.93

18.41

Vanguard FTSE Develoepd Mkts ETF

38.27

4.65

20.55

11/2/12

34.68

10.35

22.15

10.41

WisdomTree Japan Hedged Equity

45.56

1.07

4.89

2/8/13

40.47

12.58

44.81

25.99

15.58

PowerShares S&P 500 Low Volatility

Cash Holdings
Weighted Average

1.03

Portfolio Style %

Sector Weighting %

Val Blnd Grth

Sector

28 33 22

Lrg

Med

Sm

1 51100
1 2650
1 1125
1 010

Market Style %
Val Blnd Grth

26 26 25

Lrg

Med

Sm

1 51100
1 2650
1 1125
1 010

r
t
y
u

Basic Materials
Consumer Cyclical
Financial Services
Real Estate

2.21

Performance

Since
Trailing Returns %
1-Mo
YTD
12-Mo Incep2

Portfolio Market
Weighting Weighting 1/2

7
10
22
4

7
11
18
4

0
-1
4
0

i Communication Services
o Energy
p Industrials
a Technology

4
6
12
5

5
9
11
12

-1
-3
1
-7

s Consumer Defensive
d Health Care
f Utilities

14
9
8

10
10
3

4
-1
5

Asset Allocation Portfolio

0.5
60/40 MSCI ACWI/Barclays Agg Bond 1.4

5.4
6.8

NA
NA

7.7
8.8

What is the ETF Asset-Allocation Portfolio? This portfolio seeks to beat the
60/40 MSCI ACWI/Barclays US Aggregate benchmark over a full business cycle,
with the least risk possible. Using analyst discretion, it will deviate from its
benchmark allocations in order to exploit the best valuations and improving fundamentals. Tracking error will be moderate.
Who should invest in the ETF Asset-Allocation Portfolio? This portfolio is suitable for moderate-risk-seeking investors looking to maximize return and who are
comfortable deviating from the markets returns for long periods. The portfolio is to
have similar volatility to the 60% stock/40% bond index. It will be more aggressive and have higher turnover than the Income Portfolio, and use both fundamental
and technical signals.
1

Current allocation reflects change in fund values since original recommendation.

Portfolio Inception: Oct. 1, 2012. Data through August 5, 2013.

Nothing New
Continued From Previous Page

Disclosure:
I own the following funds and
stocks in my personal portfolio:
BOND, BRK.B, DEM, DODFX,
DXJ, EEMV, EFAV, HYS,
IAU, POAGX, SPLV, VASVX,
VEA, VIG, XLF

about 20% of my investable assets). This way, Im

further aligning my interests with yours.
Revisiting a Favorite

I like Vanguard Dividend Appreciation VIG. Its

cheap, well-managed, liquid and, most importantly,
sensible. Over the long run, I expect it to beat the
market on a risk-adjusted basis. (A high-up Vanguard
executive once said he expects VIG to be the bestperforming Vanguard fund over the next 100 years. I
wouldnt go that far, but I dont think the sentiment
is too far off the mark.) However, theres nothing magical about VIGs methodology: It uses a rather blunt
rule10 years of uninterrupted dividend increases
to pick its holdings. Such rules are robust, but they
can miss nuance. VIG works because it buys quality
stocks, which have economic moats that enable them
to grow their earnings (and dividends) through thick
and thin. There are many plausible ways to identify
economic moats. I think iShares MSCI USA Quality
Factor QUAL will probably do a better job because
it mixes several reasonable signals and it weights its
holdings by multiplying the quality scores by market
weightings. VIG, on the other hand, focuses on one
signal and weights holdings by market cap, diluting its
exposure to the highest-quality stocks (though likely
not by much, as such firms tend to be big).
When QUALs liquidity picks up, I will consider
lightening up on VIG and adding QUAL. If youre comfortable trading less-liquid ETFs, feel free to jump
ahead of me. I wont be in a rush to dump VIG. QUALs
main advantage is its somewhat purer exposure to
quality stocks.
Current and Future Positioning

My last move in mid-June was a bit of lucky timing.

I lightened up on emerging-markets stocks and put 5%
of both the Income and Asset-Allocation portfolios
in financials. This was a bit of momentum-driven investing, albeit with a strong valuation rationale.
By my reckoning, banks and emerging markets have
a similar expected return based on their valuations.
However, banks are enjoying a strong tailwind thanks
to ultraeasy monetary policy propping up refinancing activity and housing prices; emerging markets are
facing a headwind, largely originating from the hang-

over Chinas experiencing as a result of going hog wild

on fixed investments. Given the choice between two
equally cheap investments, Ill almost always pick the
one with stronger positive momentum.
I havent done much since, but the rising market is
making me feel a bit uneasy. I thought U.S. stocks
were on the pricey side when the S&P 500 was 1,400,
but I held on because returns have the annoying
tendency to persist. If the U.S. market continues its
strong run, I may begin trimming my exposure to
it even before any momentum signal says I should.
However, any such moves will be gradual and slight.
Im having a hard time finding great bargains. I may
raise more cash over the next few months, bringing
my allocations in both portfolios to around 20%.
Ill also reiterate what you should sell: long-term
bonds. They dont belong in your portfolio, unless you
highly value the depression insurance they provide.
I think inflation is far more likely than deflation over
the next 20 to 30 years. Most central bankers have
expressed a strong preference for slightly higher inflation than even mild deflation, for sensible reasons.
I dont think that will change. I also suspect that theres
far too much debt floating around for all lenders to
be made whole.
2013 Morningstar, Inc. All rights reserved. Any opinions, recommendations, or information contained herein: (i) is for educational purposes only; (ii) is not guaranteed to be
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in any investable product that tracks a Morningstar index.
Investments in exchange-traded funds involve risk and may not always be profitable. ETFs
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NAV will fluctuate due to changes in the market value of its underlying holdings whereas
its market price will fluctuate in accordance with changes in the NAV plus the ETFs
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does not. In transacting in ETFs, investors usually incur a brokerage fee/commission. Past
performance is no guarantee of future results.

Morningstar ETFInvestor

Bad Times
Lessons From History | Samuel Lee

Lets talk about losing money. I think everyone should

think about how much money they can lose and
whether they can tolerate those losses. Unless youre
in cash and cashlike investments, odds are you will,
at some point, see a big chunk of your worth evaporate. In happy times, like now, investors tend to
grossly underestimate the probability and severity of
losses, and they overestimate their tolerance for pain.
The sharp lessons of history are a potent antidote to
the dulling effects of a bull market.
From 1926 to 2013, the S& P 500 has drawn down
more than 50% of its real value from its most recent
peak on at least three occasions: 79% from August
1929 to May 1932, 51.9% from December 1972 to
September 1974, and 54% from August 2000 to February 2009. (Only in May of this year did the S& P
500 surpass the after-inflation, total return peak it
achieved during the tech bubble.) It seems that every
30 years or so, the stock market takes a beating.
Despite the inevitability of bad times, most investors
arent prepared for them because they form their
expectations of risk on whats happened in the recent
past. Thats like building a house on a floodplain
based on the climate over the past few years, ignoring
the once-a-decade floods that devastate the area.
You dont want to be in a position where youre rushing to buy flood insurance as soon as the river starts
swelling, or laying sandbags around your abode while
the flood waters are already lapping at your doorstep, because by then its too late.
I think most investors know equities can lose big,
because theyve gone through the tech crash and the
financial crisis. But I dont think most investors
know how badly bonds can lose. Many bond investors
havent experienced a single flood. According to

August 2013

the financial media, the closest thing to a flood that

counts happened in 1994, during which the 10 -year
Treasury went to about 8% from 5.7%. Over that
time, an investor in a 10 -year Treasury would have
experienced a peak-to-trough loss of about 10%.
Fortune ran an article titled The Great Bond Market
Massacre. We recently had investors hyperventilating when the yield on the 10 -year rate went to
2.6% from 1.6% in a month. Id call both paper cuts,
to be honest.
A real bond-market massacre began in December
1940 and didnt stop until August 1952, a time over
which intermediate-term U.S. Treasury bonds experienced a peak-to-trough loss of 37.8% after inflation and including reinvested coupons. The U.S.
government paid back its accumulated wartime debts
in debased dollars.
The United States isnt unique. The United Kingdom
did the same thing several times over its long history.
(It costs a lot of money to take over the world and
maintain a global empire.) Its simply the nature of
governments to inflate away their big debts whenever possible.
However, inflationary defaults happen in bursts. Economies can enjoy decades of relative stability, which
lulls investors into narrowing their perspective of
what counts as possible or extraordinary. I think thats
true of many investors today. A fast rise in interest
rates isnt unprecedented.
So whats the point of talking about the unpleasant,
scary history of financial markets? Its not to scare you
into cash, which would all but doom the long-run
investor to lose money at todays miserly yields. Its to
argue that the only real protection involves accepting equity risk and managing it intelligently, buying
when equities are cheap and lightening up on them
when theyre not. In my opinion, theres no more reliable way to maintain purchasing power.

Flight to Quality
News | Robert Goldsborough and Samuel Lee

Fund sponsors are herd animals. Over the past few

months, theyve rushed to launch or announce plans
for quality funds. While a spate of fund launches is
often one of many signs that an asset class is becoming dangerously expensive or crowded, I dont
think this is the case with the quality funds. Yes,
theres pandering going onwho doesnt love quality
or dividend growth?but theres also little sign
that a quality bubble exists. Quality funds havent
gathered much in the way of assets, and quality
stocks arent trading at the valuation premiums to the
market theyve historically commanded. In fact, I
think the gold-rush dynamics in this area are great for
investors, who benefit from competition driving
expense ratios to rock-bottom levels. IShares is leading the way with a quality fund that charges an
annual fee of only 0.15%. Thats within spitting distance of plain-vanilla passive funds.
IShares Launches Tech-Heavy, Quality
Factor ETF
On July 18, iShares launched IShares MSCI USA
Quality Factor QUAL. QUAL is the newest member
of iShares suite of factor-based ETFs created in
conjunction with the Arizona State Retirement System,
the first of which began trading on April 18. Other
funds in the suite focus on momentum, size, and
value factors.

Like the other factor-based ETFs, the new quality ETF

tracks an MSCI index and aims to exploit a specific
factor--quality--that academic and industry research
has shown to generate outperformance over the
broad market.
QUAL , which charges 0.15%, holds 124 companies.
It tracks an index of U.S. large- and mid-cap stocks
that are chosen from the MSCI USA Index with high
returns on equity, stable year-over-year earnings

growth, and low financial leverage. (QUAL is analyzed

in depth on Page 12.)
WisdomTree Rolls Out Small-Cap and EmergingMarkets Dividend Growth Funds
On July 25, WisdomTree launched WisdomTree U.S.
SmallCap Dividend Growth DGRS. The firm
followed up on Aug. 1 with WisdomTree Emerging
Markets Dividend Growth DGRE.
Like WisdomTree U.S. Dividend Growth DGRW,
which began trading in May, the funds first screen for
dividend-paying stocks with a coverage ratio of at
least 1. Then the firms are assigned a growth score
based on analysts projected earnings growth and
a quality score based on three-year average return on
assets and three-year average return on equity. The
growth and quality scores are equal weighted. The
firms with the highest scores are then weighted
based on their share of projected aggregate dividends.
DGRS index contains the companies in the bottom
25% of the market cap of the broader WisdomTree
Dividend Index after the 300 largest companies have
been removed. Then, its index takes the top 50%
of companies with the best combined rank of those
same fundamental metrics listed above.
DGREs index begins with the WisdomTree Emerging
Markets Dividend Index and applies the same selection criteria and is based on the top 50% of eligible
companies ranked by their composite scores.
DGRS and DGRE charge annual fees of 0.38% and
0.63%, respectively.

WisdomTrees international dividend-growth funds

come a few months after Northern Trust, under the
FlexShares brand, launched its international Quality
Dividend series of funds. FlexShares International
Quality Dividend IQDF comes in two alternative
flavors: Defensive IQDE, targeting lower-beta stocks;
and Dynamic IQDY, targeting higher-beta stocks.
All three funds charge an annual fee of 0.47%.

Morningstar ETFInvestor

EGShares Launches Emerging-Markets Dividend Growth Fund

On July 1, EGShares launched EGShares Emerging
Markets Dividend Growth ETF EMDG, which
tracks the FTSE Emerging All Cap ex-Taiwan Diversified Capped Dividend Growth 50 Index.

five years. The parent index of both proposed funds

indexes is the MSCI Emerging Markets Index.
Meanwhile, the proposed Market Vectors MSCI
International Quality ETF would follow the same
criteria as the proposed emerging-markets quality ETF
but would include companies from both developedmarkets and emerging-markets countries and would
exclude U.S. companies. Finally, the proposed
Market Vectors MSCI International Quality Dividend ETF would follow the same criteria as the
proposed emerging-markets quality dividend ETF but
also would include companies from developedand emerging-markets countries (and again would
exclude U.S. companies). The parent index of
both proposed funds indexes is the MSCI ACWI ex
USA Index.

The fund selects stocks that paid dividends in each

of the past five years, grew dividends by at least 6%
annualized over the period, kept dividend payout
ratios below the average for the Industry Classification Benchmark plus an additional 30%, have
a trailing dividend yield at least half of the parent
indexs, and have a minimum of one year of positive trailing earnings.
It caps the number of stocks from any given country or
sector at eight, and it seems to exclude Taiwan.
The numerous screening criteria suggest that any backtested results should be met with even more skepticism than usual. EMDGs hefty 0.85% expense ratio
also warrants skepticism.
Van Eck Files for International MSCI
Quality ETF s
Almost as if to ride the coattails of iShares launch
of QUAL, on July 24, Van Eck filed with the SEC
for permission to create four passively managed ETFs
that would hold foreign companies and track
MSCI indexes that include only companies with high
quality scores based on certain fundamental
characteristics.
All proposed funds would track indexes that rank
possible constituents based on return on equity, yearover-year earnings growth, and earnings leverage.
The proposed Market Vectors MSCI Emerging Markets Quality ETF would hold companies scoring
high on those variables from emerging-markets countries, including Brazil, China, India, Russia, and
Taiwan. The proposed Market Vectors MSCI Emerging Markets Quality Dividend ETF would hold
companies meeting those same criteria but also with
a dividend yield at least 30% higher than its parent
indexs yield and that has been positive for the past

August 2013

Van Eck did not provide ticker symbols or expense

ratios for the proposed ETFs.

ETFs Launched In July

Ticker

Exp. Ratio %

First Trust Morningstar Mgd Futs Strat

FMF

0.95

LocalShares Nashville Area ETF

NASH

0.49

KraneShares CSI China Internet ETF

KWEB

0.68

VelocityShares Equal Risk Wt Lg Cp ETF

ERW

0.65

WisdomTree Emerging Mkts Dividend Gr

DGRE

0.63

WisdomTree US SmallCap Div Growth

DGRS

0.38

KraneShares CSI China Five Yr Plan ETF

KFYP

0.68

AdvisorShares Athena Intl Bear ETF

HDGI

1.50

iShares MSCI USA Quality Factor

QUAL

0.15

Guggenheim BulletShares 2022 Corp Bd ETF

BSCM

0.24

Guggenheim BulletShares 2021 Corp Bd ETF

BSCL

0.24

iSharesBond 2016 Corporate Term

IBDA

0.10

iSharesBond 2018 Corporate Term

IBDB

0.10

iSharesBond 2020 Corporate Term

IBDC

0.10

iSharesBond 2023 Corporate Term

IBDD

0.10

SPDR Russell 2000 ETF

TWOK

0.18

EGShares Emerging Markets Div Gr ETF

EMDG

0.85

10

iShares MSCI Mexico Capped EWW

Fund Analysis | Patricia Oey and Samuel Lee

Assets ($Mil)

Expense Ratio %

Tax-Cost Ratio %

Turnover %

Inception

2,220 0.53 0.28 10.0 03/12/96

Total Return %

p EWW

p MSCI Mexico GR USD

p MSCI EM GR USD
1000
780
560
340
120

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Performance data from 03/31/199607/31/2013.

Returns

3-Mo

EWW

-8.12% 7.17% 10.40% 9.19% 13.01%

1-Year 3-Year 5-Year SI

Yield 1.0

MSCI EM GR

-7.67%

2.30%

1.33%

1.44%

6.63%

P/E 15.8

MSCI Mexico GR -7.61%

5.99%

10.20%

8.94%

13.81%

P/B 2.5

Wtg (%)

Analyst Fair Value

Top Holdings

Fundamental

17.5

P/FV

Fomento Economico Mexicano SAB de CV Units

8.7

Coverage 6.7

Wal - Mart de Mexico, S.A.B. de C.V. Class V WMMVF

6.1

Cemex, S.A.B. de C.V. CXMSF

5.5

Moat Rating

Grupo Televisa, S.A.

5.0

Wide 0.8

Grupo Mexico, S.A.B. de C.V.

4.7

Narrow 5.6

Grupo Financiero Banorte SAB de CV

4.2

No Moat

Alfa, S.A.B. de C.V. ALFFF

3.6

Grupo Modelo, S.A.B. de C.V. GPMCF

3.2

Kimberly - Clark de Mexico S.A.B. de C.V. KCDMF

3.0

Industrias Peoles, S. A.B. de C. V.

2.9

America Movil, S.A.B. de C.V.

Data through Aug. 6, 2013.

0.0

I normally dont look at single-country funds, especially ones for small, emerging-markets countries.
Theyre expensive, specialized, and hard to analyze.
Im making an exception for iShares MSCI Mexico
Capped EWW not because I think you should go
out and buy it, but because it shows that great economic growth is not necessary for great stock returns.
According to the OECD, Mexicos GDP grew 2.8%
annualized from 1988 to 2012, a far cry from Chinas
sustained 10% growth over much of that period.
Yet the MSCI Mexico Index grew by about 20% annualized, beating the broader MSCI Emerging Markets
Index by about 8 percentage points and the MSCI EM
Latin America Index by 2 percentage points.
What explains this phenomenal run? Much of it certainly has to do with valuations. Unfortunately, I
dont have historical valuation data, so I dont know
how big of a contributor it was.
But another factor was the remarkable performance
of a single firm, Amrica Mvil AMOV (and its
previous incarnations), which under Carlos Slims
stewardship has grown into Latin Americas biggest telecom firm. Slim got his start in the industry by
purchasing Mexicos fixed-line telephone monopoly
at a cut-rate price when the government decided to
get out of the phone bus-iness. Fueled by monopoly
profits, Slim expanded his empire into wireless
communications and other Latin American countries.
Amrica Mvil is so dominant, at times it has accounted for more than 25% of EWWs assets, threatening EWWs status as a Registered Investment
Company under IRS regulations. BlackRock changed
EWW s index to a capped version to avoid
this problem.
Amrica Mvils ability to entrench itself behind regulations and earn monopolylike profits suggests that
Mexicos regulators historically havent had much
power, or were captured by the very firms they were
tasked to regulate. This may have contributed to
Mexican firms ability to generate substantial returns
on capital over such a long period of time.

Morningstar ETFInvestor

However, were left to explain why foreign shareholders benefited. If regulators cant protect their
own citizens, why would they protect foreign shareholders? Big Russian and Chinese companies, for
example, have also enjoyed privileged perches,
but insiders have done excellent jobs extracting all
the benefits for themselves.
I think it has to do with the fact that the U.S. considers
Mexico well within its sphere of influence. Because
of Mexicos tight integration with the U.S. market and
close proximity, the U.S. has both ample incentive
and the means to protect its interests. This may explain why American firms have had great success
setting up publicly traded subsidiaries in Mexico. It
also explains why Mexico has allowed Wal-Mart
WMT to become the largest private employer in the
country, a state of affairs most emerging-markets
would probably reject. (Wal-Mart has had a devilishly
hard time entering India, despite the countrys amicable relations with the U.S.)
So there you have it. Low valuations, weak regulators, and an outside hegemons aegis all worked
together to produce phenomenal results for foreign
shareholders, despite low growth.
Below is my colleague Patty Oeys view on Mexicos
fundamentals.
Fundamental View
In the wake of the devaluation of the peso and the
economic crisis of the mid-1990s, Mexicos economy
has benefited from both sound macroeconomic policy and growing exports. The benefits have shown up
in the form of steady job growth and mild inflation.
More recently, Mexicos relatively attractive sovereign
debt yields and stable macroeconomic fundamentals have attracted strong investment inflows into
Mexican equities and debt, which in turn has supported the Mexican peso.
Still, the country has problems. Mexicos president
Enrique Pena Nieto has laid out a reform program

August 2013

11

to tackle them, including overregulation, underinvestment in the state-owned oil monopoly Pemex, and
an unhealthy dependence on oil revenue to fund the
government. If some of these plans come to fruition, it will be positive for Mexicos economy. Ironically, whats good for Mexico isnt necessarily good
for shareholders. The presidents planned reforms
may expose cosseted firms to the harsh forces
of competition.
EWW holds a number of them. Amrica Mvil is one
of the worlds most profitable telecom companies,
largely because of its dominant 70% share in Mexicos wireless market. Over the years, Amrica Mvil
has used its ample free cash flows from its Mexico
operations to fund international expansion. It is now
the largest wireless provider in the region, with
about 200 million customers. A number of EWW s
other large constituents have enjoyed a similar
path to success, starting with a highly profitable stranglehold on the Mexican market, which ultimately
funded international expansion. These companies include retailer Fomento Economic Mexicano FMX,
bottler Coca-Cola FEMSA KOF, and building materials company CEMEX CX.

A second irony is that due to its relative stability

and higher yields, Mexico has recently enjoyed strong
foreign fund inflows. This puts it in danger of hot
money flowing out, possibly triggered by a wind-down
in quantitative easing by central bankers in the developed world or a sudden spike in market volatility.

12

iShares MSCI USA Quality Factor QUAL

Fund Analysis | Samuel Lee

Assets ($Mil)

Expense Ratio %

Tax-Cost Ratio %

Turnover %

Inception

110 0.15 07/16/13

Total Return %

p QUAL

p MSCI USA GR
140

108

76

44

Quality is one of those slippery investment terms.

Who doesnt love high-quality companies, of course
run by able managers and bought at low prices? I
admit Ive added to the confusion by using the word
inconsistently or imprecisely myself. At its worst,
quality simply becomes indistinguishable from good.
The most logical and useful definition I know of is
Warren Buffetts concept of the economic moat, a durable competitive advantage that allows a firm to
reap above-average returns on its capital even when
faced with aggressive competitors. Quality stocks
have wide moats; theyre insulated from the ravages
of creative destruction. A quality strategy, then,
should capture the essence of Buffetts moat-investing philosophy, and indeed thats what many professional investors profess to do: buy great companies at
reasonable prices, also known as growth-at-areasonable-price, or GARP, investing.

12
2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Performance data from 06/30/0307/31/13.

Hypothetical Returns

3-Mo 1-Year 3-Year 5-Year 10-Year

Fundamental

MSCI USA Qlty GR

4.48%

19.55%

20.53%

10.24%

8.61%

Yield

MSCI USA GR

6.05%

27.02%

20.62%

8.05%

7.98%

P/E 15.5
P/B 4.1

Top Holdings

Wtg (%)

Analyst Fair Value

Apple Inc AAPL

5.3

P/FV 1.0

Google, Inc. Class A XOM

4.9

Coverage 96.1

Exxon Mobil Corporation GOOG

4.9

Chevron Corp CVX

4.9

Moat Rating

International Business Machines Corp MSFT

4.6

Wide 53.2

Microsoft Corporation IBM

4.5

Narrow 37.5

Oracle Corporation ORCL

2.9

No Moat

Home Depot, Inc. HD

2.7

McDonalds Corporation MCD

2.5

Qualcomm, Inc. QCOM

2.4

Data through Aug. 6, 2013.

5.4

Does iShares MSCI USA Quality Factor QUAL capture some of Buffetts essence? I dare say it does.
Now, Im not claiming youre going to get Buffett-like
results by owning this fund. However, its clear
that MSCI took its inspiration from all the right places
when it devised the index.
In the early 1980s, Buffett began advertising his
acquisition criteria (the emphasis is mine):
We prefer:
1 large purchases (at least $5 million of aftertax
earnings),
2 demonstrated consistent earning power
(future projections are of little interest to us, nor
are turnaround situations),
3 businesses earning good returns on equity while
employing little or no debt,
4 management in place (we cant supply it),
5 simple businesses (if theres lots of technology,
we wont understand it),
6 an offering price (we dont want to waste our
time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).
Compare that with the MSCI Quality Index, which
selects stocks with:
1 high return on equity (good returns on equity),

Morningstar ETFInvestor

2 low debt/equity ratios (little or low debt),

3 low variability in their year-over-year per-share
earnings growth over the trailing five years
(consistent earnings power).

This by itself doesnt mean the index can capture

Buffetts magic. (It cant.) Buffett takes into consideration valuation, managerial quality, and his assessment of the industrys future dynamics, among other
things. He doesnt make many purchases, and when
he does he keeps them, whereas this index buys more
than a hundred companies and can churn them during its semiannual rebalances. The best that can be
said is that if Buffett buys the needle, the index buys
the haystack. However, that need not invalidate the
strategy, because its buying the haystacks where
Buffett tends to find needles.
We dont have much live performance data for QUAL,
which was launched in July. So we have to resort
to MSCIs hypothetical return data, which begins in
December 1981. The starting date is a little suspiciouswhy 1981, when MSCI has the data to go back
further? Probably because quality stocks took a
savage beating during the 1970s. They achieved lofty
price/earnings multiples during the Nifty Fifty craze
and became relatively cheap by 1980. According to a
study on quality strategies conducted by MFS, quality
stocks (defined using somewhat different criteria)
underperformed the broad market by more than 20%
from 1975 to 1980.1
Exhibit 1: Relative Cumulative Returns of MSCI Quality and MSCI USA
1.8

1.6

1.4

1.2

1.0

Data through July 31, 2013.

13

Even with the 70s bust excluded, the quality index

beat the broad-market MSCI USA Index by only
1.7% annualized. So whats the excitement about?

All the quantitative criteria Buffett describes are

there, though MSCI doesnt exclude technology
firms. The indexs selection rules are simple, commonsense interpretations of Buffetts criteria.

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

August 2013

For one, the boost is about as consistent as you could

ask for in a nonfraudulent, non-data-mined return
series. Exhibit 1 shows the cumulative total return of
the quality index divided by the cumulative total
return of the MSCI USA Index. When the line slopes
up, quality is outperforming; when it declines,
quality is underperforming. It seems that as long as
quality stocks dont trade at extreme valuations,
they enjoy a persistent performance edge over a full
business cycle.
In addition, after taking into account the indexs
tilts to value, size, and momentum factors, its annualized excess returns rise to 3.1%. Adding the fund
to a conventional equity portfolio may result in decent
diversification benefits.
GMO argues that U.S. quality stocks arent trading at
the valuation premiums theyve historically commanded, making them relatively attractive. Indeed,
QUALs aggregate forward price/earnings, price/sales,
and dividend yield arent much different from the
S& P 500s, even though QUALs holdings have experienced faster growth in earnings, sales, cash flow,
and book value. As of June 30, GMO expects U.S.
quality stocks to earn 3.7% annualized after inflation
during the next seven years, much better than
the negative returns it expects the aggregate market
to experience.

Finally, out of curiosity, I checked whether the MSCI

Quality Index could explain away the historical
excess returns of GMO Quality GQETX and Jensen
Quality Growth JENSX, Silver- and Gold-rated
funds, respectively. Lo and behold, it could. In fact,
once you control for the funds substantial loadings to the quality factor, they actually underperformed, suggesting that both funds historical returns
can be passably mimicked by MSCIs mechanical
quality strategy.
1

Katrina Mead, Jonathan Sage, and Mark Citro. Power Couple: Quality and
Value Are Strong Drivers of Long-Term Equity Returns. MFS, 2013.

14

Factor Models: A Primer

The graph shows a strong linear relationship between

the market and Magellan: When the market is up,
Magellan is up about the same amount; when the
market is down, the fund is down the same amount.

Finance | Samuel Lee

The linear factor model attempts to answer a

simple question: Can a return stream be broken down
into explainable and unexplainable parts?
Most studies looking at mutual fund manager performance use factor models to disentangle the roles
of skill and luck and risk in producing a given managers return stream.
Roughly speaking, a linear factor model creates the
best-fitting custom benchmark for each manager.
It provides additional information, such as the constitution of the benchmark, how nicely the benchmark
fits the managers returns, by how much the manager
beat the benchmark, and how likely these findings
are attributable to chance.
My goal for this primer is to provide a practical understanding of factor models. I try to keep the math
as simple as possible, but some familiarity with statistics helps a lot.
The Case of Fidelity Magellan
Exhibit 1 is a scatter plot of the monthly returns over
cash of Fidelity Magellan FMAGX (vertical or y-axis)
and the U.S. stock market (horizontal or x-axis) from
May 2003 to March 2013.

The data suggest there is a strong fundamental relationship between this fund and the market. And
indeed there is: Magellan is a well-diversified basket
of U.S. equity stocks and therefore is exposed
to the same broad macroeconomic risks as the U.S.
stock market.
A Brief Statistical Detour
The factor models were interested in use linear
regression, a statistical method that fits a line through
two sets of data, a dependent variable that we want
to explain, and one or more independent or explanatory variables (which, naturally, do the explaining).
Fidelity Magellan is our dependent variable, and the
stock market is our explanatory variable. We could
use the fund as the explanatory variable and the market as the dependent variable, but that would be
getting our causation backward: Changes to Magellan
dont move the markets; markets move Magellan.
So we always begin with a fundamental story before
setting up the scaffolding around the numbers.

The fitted regression line through the scatter plot

provides an estimate of the true relationship between
the market and this fund.
Recall from high school geometry that the equation
for a line follows the form
y = mx + b,

Exhibit 1: Magellans Returns Are Linearly Related to the Market (05/200303/2013)

Magellan-Rf Return

20

-25

15
10
5
-20

-15

-10

-5

0
-5

10

where m is the slope term and b is the y-intercept

term, where the line crosses the y-axis. By the
conventions of financial statistics, the intercept term
b is denoted , Greek for alpha, and the slope term
m is denoted by , Greek for beta, and the terms are
rearranged such that

-10
-15
-20
Market-Rf Return

y = + x,

Morningstar ETFInvestor

where y is the funds excess return (fund return minus

the risk-free or cash rate), and x is the markets
excess return (market return minus risk-free). In order
to make y and x more explicit, theyll henceforth
be renamed R-Rf and Mkt-Rf, respectively, where R is
the monthly fund return, Rf is the risk-free return, and
Mkt is the S& P 500s return:
R-Rf = + *(Mkt-Rf )

15

August 2013

extreme data points that skewed our estimates of

alpha and beta. Of course, no one knows the true
relationship; statistical methods can provide only
informed guesses as to what it actually is.
The statistical uncertainty of the alpha and beta terms
is quantified by the p-value, which indicates the
percent chance of obtaining as extreme of a value if
the alpha or beta were zero.

The linear regression procedure finds the values of

and that produce the best-fitting line. (A technical
note for the curious: The line is fitted to minimize the
total sum of the squares of the vertical distances
between the data points and the line.) In this case,
the procedure estimates the following:

The regression output looks like this:

R-Rf = -0.35 +1.16 (Mkt-Rf)

where the intercept is the monthly unexplained

return, or alpha, and Mkt-Rf is the market factor. The
intercepts p-value shows that theres only a 1%
chance an outcome this bad or worse couldve occurred due to luck, assuming the funds true alpha
is zero (that is, the funds managers had no skill). The
t-statistic is another way of expressing the p-value
(and favored over the p-value; however, its interpretation isnt as intuitive, so Im glossing over it). Finally,
the R 2 is a measure of fit. An R 2 of 100% indicates
that the model perfectly fits the data. A value of
0% indicates its completely unrelated to it. The regressions R 2 is very high, indicating it does a good
job explaining FMAGXs monthly returns.

This equation is straightforward to interpret; for each

percentage-point change in the U.S. stock markets
monthly excess return, Fidelity Magellans monthly
excess return is predicted to move in the same direction by 1.16 percentage points, minus 0.35 percentage points. For example, the equation predicts that if
the market is up 10% one month, the fund will be up
10%*1.16 0.35% = 11.25%.
The equation tells you two things. First, Magellans
return pattern can be replicated by simply leveraging
the S& P 500 by 1.16. Second, Magellan underperformed that simple leveraged strategy by 0.35 percentage points a month, or 4.2 percentage points
a year (0.35%*12).
In finance jargon, the funds beta to the market was
1.16, and its annual alpha was negative 4.2%.
Sound familiar? Thats because this is what experts
mean when they talk about beta and alpha.
Of course, Magellan couldve been unlucky. Recall that
the linear regression is an estimate of the true relationship between this fund and the market. The true
relationship could actually be y = 0.50 + 1.20x, for
example, and the period we looked at captured some

Coefficients

T-stat

P-value

-0.35 -2.55

0.01

Mkt-RF

1.16

0.00

0.92

36.54

Multifactor Models
The single-factor model I used to examine Fidelity
Magellans return is a version of the capital assetpricing model, or CAPM, which predicts that the only
way to obtain higher returns is to increase exposure to market beta. One way to test this claim is to
sort stocks by beta and see whether higher beta
is associated with higher returns. Since the 1960s,
researchers have known that its not.

In the 1970s and 1980s, researchers found that fundamentally cheap stocks beat expensive stocks
(value beats growth), and that small-cap stocks beat

16

large-cap stocks (small beats large), even when

market exposure is controlled for. Running with these
findings, Eugene Fama and Kenneth French augmented CAPM with two factors capturing the excess
returns of value and small-cap stocks, producing the
now famous Fama-French model.
They constructed their value factor by simulating the
return history of a long-short strategy that every
year bought low book/price (value) stocks and shortsold high B/P (growth) stocks. Similarly, their size
factor was simply the returns from buying small-cap
stocks and short-selling large-cap stocks each year.
They didnt add value and size arbitrarily. They found
that the lower the B/P or smaller the market cap,
the higher a stocks returns were, and this relationship was smooth. On the other hand, beta didnt
seem connected to a stocks returns in any meaningful
manner. This was, in their eyes, convincing evidence
that the stock market priced size and value as risk
factors, meaning they were associated with higher
returns because they were somehow riskier.
Around the same time Fama and French created their
famous namesake model, Narasimhan Jegadeesh
and Sheridan Titman found that stocks with relatively
high recent returns beat stocks with relatively low
returns. Soon, Mark Carhart extended the Fama-French
model with a momentum factor, constructed by
simulating the returns of a monthly strategy that
bought the best-performing stocks by trailing
12-month returns, excluding the most recent month,
and short-selling the worst-performing stocks.

factor-mimicking portfolios return, SMB (smallminus-big) is the size-factor-mimicking portfolios

return, and UMD (up-minus-down) is the momentum-factor-mimicking portfolios return.
This equation simply says that an assets return
above cash can be described as a linear combination
of exposures to market, value, size, and momentum factors, plus an unexplained alpha. The or beta
coefficients in front of each term show how sensitive the asset is to each factor, holding all other
factors constant.
Notice that the equation looks very much like the
simple line equation we countered earlier. Thats
because theyre nearly the same thing, except this
time the line is fitted to four different explanatory
variables instead of one.
The multiple linear regression procedure attempts
to find the alpha and beta coefficient values that best
explain the assets returns.
The table below shows the results of a Carhart regression of Fidelity Magellans monthly returns. The
interpretation is similar to the single-factor regression
we looked at earlier. Take HML, the value factor.

R-Rf = + *(Mkt-Rf) + *HML + *SMB + *UMD,

where R is the return of the asset, Rf is the risk-free
rate, is the unexplained return, Mkt is the U.S.
markets return, HML (high-minus-low) is the value-

T-stat

P-value

-0.32 -2.40

0.02

Mkt-RF

31.38

0.00

SMB -0.03 -0.43

0.67

HML -0.20 -3.28

0.00

UMD -0.04 -1.28

0.20

R2

The Fama-French-Carhart model has been a mainstay

of academic and practitioner research since.
It looks like this:

Coefficients

1.18

0.92

Its coefficient, or loading, of negative 0.20 means that

for each percentage point value stocks beat growth
stocks in a month, Magellans monthly return is predicted to fall by 0.20 percentage points, all other
factors held constant. Magellan has a negative loading to the value factor; that is, its behaved like a
growth fund.

Morningstar ETFInvestor

August 2013

17

Notice that the p-values of the SMB and UMD factors are 0.67 and 0.20, respectively, and the loadings
are close to zero. This says that theres a 67%
(20%) chance of obtaining as extreme of a value or
greater if the true SMB (UMD) loading were zero.
By convention a p-value of 5% or lower is considered
statistically significant.

you can obtain with low-cost index funds. Factor

models can explicate a managers process and give
you more confidence that hes doing what he says
he does. And perhaps most importantly, they instill
humility in youbeating a factor-based benchmark
is often fiendishly difficult.

Overall, the results suggest that Magellan had high

market beta, a pronounced growth tilt, a largeto mid-cap size tilt, and little exposure to momentum
stocks. Unfortunately, it underperformed its regression-based benchmark by 3.85% per year, and this
outcome was statistically significant at the 2% level.

p An assets periodic returns can be broken down

into components attributable to factors, traits that
explain or predict returns.

Summary

The Use and Abuse of Factor Models

While factor models are considered quite robust, they
have limitations. First, they often need a lot of historical data to detect statistically significant evidence of
skill (or lack thereof). A manager who beats his
regression-based benchmark over a decade may still
not be deemed to have surpassed the hurdle of statistical significance. Such is the limitation of data. This
is why finance researchers often claim that its
hard to be certain a manager is skilled, even with
many years of performance data to consider.

Second, even if you find a strategy with economically and statistically significant alpha, its unlikely to
persist. So you cant run around with a Carhart
regression, check every single mutual fund out there,
buy the highest-alpha funds, and go on to enjoy
outsized returns. In other words, past performance
doesnt predict the future (aside from a short-lived
hot hands effect).
Finally, the factor model cant capture all the important nuances of a strategy or asset. All models are
wrong to some degree. The question is whether they
say something useful.
With all those caveats out the way, factor models can
be tremendously useful. They can tell you whether an
asset or fund is offering something uniquealpha
rather than repackaging known factor exposures that

p Finance researchers broadly agree that stock returns can largely be explained by market, value,
size, and momentum factor exposures. (Bond returns
can also be broken down into factor exposures,
though linear factor models dont work as well with
them.)
p A common way to figure out an assets factor exposures is to perform a multiple linear regression of
an assets periodic returns (usually monthly) against
the returns of long-short factor-mimicking portfolios.
Doing so creates a regression-based benchmark that
tries to explain the returns of the asset.
p Unexplainable excess return, or alpha, is often
interpreted as evidence of skill or some kind of additional risk not captured by the factor model.
p Because linear regressions are statistical in nature,
their outputs shouldnt be taken as gospel. Even the
measures of statistical uncertainty that accompany
them, such as the t-stat or p-value, should be taken
with a grain of salt.

18

Historical Performance

Nuts and Bolts

ETF Watchlist Domestic Equity

NAV Return % Trailing
NAV Rtn % Ann. Tax
Current
Total
Daily
Exp.
Est.
Star
Cost
Yield Market
Assets Vol.
Ratio Holding Inception
Rating
YTD
1Mo
3Mo
1Yr
3Yr
Ratio % %
Price $
($Mil)
(Thou)
%
Costs Date

Large Blend
Guggenheim Russell Top 50 Mega Cap XLG
Guggenheim S&P 500 Equal Weight RSP
iShares Core S&P 500 ETF IVV
iShares Core S&P Total US Stock Mkt ETF ITOT
iShares Dow Jones U.S. Index IYY
iShares Russell 1000 Index IWB
iShares Russell 3000 Index IWV
iShares S&P 100 Index OEF
Market Vectors Wide Moat ETF MOAT
Schwab U.S. Broad Market ETF SCHB
Schwab U.S. Dividend Equity ETF SCHD
Schwab U.S. Large-Cap ETF SCHX
SPDR S&P 500 SPY
g Vanguard Dividend Appreciation ETF VIG
Vanguard Large Cap ETF VV
Vanguard Mega Cap ETF MGC
Vanguard Russell 1000 Index ETF VONE
Vanguard Russell 3000 Index ETF VTHR
Vanguard S&P 500 ETF VOO
Vanguard Total Stock Market ETF VTI

QQQQ 16.8
QQQQQ 22.3
QQQQ 19.6
QQQQ 19.9
QQQQ 19.9
QQQQ 19.9
QQQQ 20.1
QQQQ 18.2
NR
17.9
QQQQ 20.3
NR
22.2
QQQQ 19.8
QQQQ 19.5
QQQQQ 18.3
QQQQ 19.8
QQQQ 19.3
NR
19.9
NR
20.2
NR
19.6
QQQQ 20.4

4.5
5.4
5.1
5.2
5.3
5.3
5.5
5.0
7.2
5.4
4.3
5.2
5.1
5.3
5.3
5.2
5.3
5.5
5.1
5.5

5.0
7.1
6.1
6.3
6.2
6.2
6.5
5.6
9.3
6.5
5.1
6.1
6.1
5.0
6.1
6.1
6.2
6.5
6.1
6.6

18.6 16.6 0.78

32.5 18.7 0.57
24.9 17.6 0.44
25.8 17.8 0.41
26.0 17.8 0.41
26.1 17.9 0.43
26.6 17.9 0.41
21.4 17.1 0.46
31.8


26.7 18.2 0.70
23.8


25.5 17.8 0.72
24.8 17.6 0.69
23.5 16.8 0.36
25.6 17.8 0.33
24.3 17.7 0.35
26.1


26.7


25.0


26.8 18.2 0.33

2.1 119.12 542 24 0.20 0.28 05-04-05

1.4 64.72 4,713 765 0.40 0.46 04-24-03
1.9 169.55 44,704 5,397 0.08 0.06 05-15-00
1.8 77.15 810 150 0.13 0.11 01-20-04
1.8 85.17 753 42 0.20 0.22 06-12-00
1.9 93.87 7,978 568 0.15 0.13 05-15-00
1.8 100.78 4,661 280 0.20 0.20 05-22-00
2.0 75.73 4,037 717 0.20 0.24 10-23-00
0.5
26.22
283
81 0.49
04-24-12
1.9 40.98 2,194 471 0.06 0.01 11-03-09
2.6
34.20
1,162
296 0.17
10-20-11
1.9 40.23 1,791 402 0.08 0.08 11-03-09
2.0 168.71 154,099
134,235 0.09 0.14 01-22-93
2.1 69.78 16,993 1,207 0.10 04-21-06
1.9 77.34 4,223 195 0.10 0.16 01-27-04
2.1 57.69 599 33 0.12 0.13 12-17-07
1.8
77.58
225
27 0.12
09-20-10
1.7
78.00
78
3 0.15
09-20-10
2.0
77.23 10,647 1,939 0.05
0.03 09-07-10
1.9 87.42 33,455 2,539 0.05 0.01 05-24-01

Large Value
iShares High Dividend Equity HDV
iShares MSCI USA Minimum Volatility USMV
iShares Russell 1000 Value Index IWD
iShares Russell 3000 Value Index IWW
iShares S&P 500 Value Index IVE
PowerShares FTSE RAFI US 1000 PRF
e PowerShares S&P 500 Low Volatility SPLV
Schwab U.S. Large-Cap Value ETF SCHV
SPDR Dow Jones Industrial Average DIA
SPDR S&P Dividend SDY
Vanguard High Dividend Yield Indx ETF VYM
Vanguard Mega Cap Value Index ETF MGV
Vanguard Russell 1000 Value Index ETF VONV
Vanguard S&P 500 Value Index ETF VOOV
Vanguard Value ETF VTV
WisdomTree Dividend ex-Financials DTN
WisdomTree Equity Income DHS
WisdomTree LargeCap Dividend DLN
WisdomTree Total Dividend DTD

NR
18.6
NR
17.4
QQQ 22.0
QQQ 21.9
QQQ 21.5
QQQQQ 22.9
NR
18.8
QQQQ 21.0
QQQQ 19.8
QQQQQ 22.0
QQQQQ 21.1
QQQ 22.3
NR
22.0
NR
21.5
QQQ 22.6
QQQQQ 18.2
QQQQ 18.2
QQQQ 17.7
QQQQ 18.4

3.2
3.6
5.4
5.5
5.1
5.5
4.2
5.0
4.1
5.6
4.3
5.1
5.4
5.1
5.2
3.8
3.1
4.1
4.5

0.8
0.8
7.1
7.2
6.7
7.1
1.2
5.6
5.1
4.8
5.0
7.1
7.1
6.7
6.9
2.7
0.8
3.7
4.1

15.6


17.1


30.4 17.8 0.49
30.6 17.6 0.48
30.0 17.1 0.50
32.4 18.3 0.72
18.6


26.6 17.7 0.97
22.1 16.9 0.85
27.8 16.8 1.06
23.6 19.5 0.50
28.3 17.3 0.44
30.5


30.1


29.3 17.5 0.43
21.9 19.6 1.35
17.4 19.3 1.38
20.1 18.4 1.06
21.7 18.4 1.09

3.1
68.59
3,245
312 0.40
0.44 03-29-11
2.1
33.77
2,325 2,264 0.15
10-18-11
2.0 87.83 19,223 1,460 0.20 0.25 05-22-00
2.0 114.98 540 40 0.25 0.28 07-24-00
2.1 79.74 6,440 679 0.18 0.22 05-22-00
1.8 76.11 2,194 176 0.39 0.37 12-19-05
2.7
32.35
4,743 1,624 0.25
05-05-11
2.4 38.07 713 114 0.13 0.15 12-11-09
2.2 154.84 13,207 6,148 0.17 0.19 01-13-98
2.6 70.13 12,704 1,041 0.35 0.34 11-08-05
2.9 58.89 6,603 689 0.10 0.05 11-10-06
2.4 51.61 639 58 0.12 0.09 12-17-07
2.1
76.86
169
25 0.15
09-20-10
2.0
76.67
115
10 0.15
09-07-10
2.3 71.25 11,360 940 0.10 0.20 01-26-04
3.6 64.59 1,188 73 0.38 0.36 06-16-06
3.5 53.13 749 71 0.38 0.31 06-16-06
2.9 62.29 1,724 129 0.28 0.27 06-16-06
2.9 62.85 358 33 0.28 0.32 06-16-06

Large Growth
Guggenheim S&P 500 Pure Growth RPG
iShares Russell 1000 Growth Index IWF
iShares Russell 3000 Growth Index IWZ
iShares Russell Top 200 Growth Index IWY
iShares S&P 500 Growth Index IVW
PowerShares QQQ QQQ
Schwab U.S. Large-Cap Growth ETF SCHG
SPDR S&P 500 Growth ETF SPYG
Vanguard Growth ETF VUG
Vanguard Mega Cap Growth Index ETF MGK
Vanguard Russell 1000 Growth Index ETF VONG
Vanguard S&P 500 Growth Index ETF VOOG

QQQQQ 24.7
QQQQ 17.6
QQQQ 18.2
QQQQ 15.9
QQQQ 17.6
QQQQQ 16.9
QQQQ 18.4
QQQQ 17.6
QQQQ 16.5
QQQQ 15.6
NR
17.6
NR
17.6

5.9
5.3
5.5
4.8
5.1
6.3
5.4
5.0
5.3
5.3
5.3
5.1

8.6
5.2
5.7
4.2
5.5
7.4
6.6
5.5
5.0
4.6
5.2
5.5

33.0 21.9 0.22

21.4 17.8 0.33
22.4 17.9 0.31
17.9 17.3 0.38
20.3 18.0 0.37
18.5 19.4 0.37
24.2 17.7 0.41
20.2 18.3 0.53
21.5 18.0 0.22
19.7 17.8 0.24
21.5


20.3

0.7 61.43 558 72 0.35 0.36 03-01-06

1.6 76.47 19,970 1,579 0.20 0.20 05-22-00
1.5 62.87 417 19 0.25 0.21 07-24-00
1.8 39.87 383 50 0.20 09-22-09
1.7 88.45 7,614 406 0.18 0.21 05-22-00
1.3 75.77 37,002 29,970 0.20 0.20 03-10-99
1.3 40.30 817 128 0.13 0.11 12-11-09
1.6 76.51 283 13 0.20 09-25-00
1.4 82.51 11,121 573 0.10 1.02 01-26-04
1.6 63.71 1,057 90 0.12 1.18 12-17-07
1.6
78.52
151
10 0.15
09-20-10
1.6
79.25
150
10 0.15
09-07-10

Mid-Cap Blend
iShares Core S&P Mid-Cap ETF IJH
iShares Russell Midcap Index IWR
Schwab U.S. Mid-Cap ETF SCHM

QQQQ 21.6 6.2 6.6 32.9 19.0 0.33 1.4 123.02 17,379 795 0.17 0.08 05-22-00
QQQQ 22.0 5.8 6.7 32.2 18.8 0.39 1.6 137.00 8,238 223 0.20 0.16 07-17-01
NR
22.8
6.3
7.2
34.8


1.6
33.97
603
187 0.13
0.07 01-13-11

i Income Portfolio Holding g Asset-Allocation Portfolio Holding e Both Income and Asset-Allocation Holding

Fundamentals

Valuation

Portfolio Style

19

Risk

5Yr Historical Growth % Price/ Price/
Covrg Average Assets Worst
3 Yr
3 Yr



Price/
Cash
Price/
Price/
Fair
Rate
Style
Mrkt Cap
# of
in Top Turnover
3Mo
Standard Sharpe
Ticker
Earnings Sales
Cash Flow ROE
Earn
Flow
Book
Sales
Value %
Box
($Mil)
Holdgs
10 %
%
Return % Deviation Ratio

Lg Blnd
XLG 11.6 4.0 8.6 21.4 16.2 10.3 2.5 2.0 1.0 100 4 173,460 52 37.8 7 -23.5
RSP 6.3 4.5 3.7 16.8 18.6 10.0 2.3 1.3 1.0 92 4 17,475 501 2.4 20 -36.2
IVV 6.8 2.9 6.6 19.7 17.2 10.3 2.4 1.5 1.0 97 4 61,482 503 18.0 4 -29.6
ITOT 6.9 3.2 6.8 18.9 17.5 10.4 2.4 1.5 1.0 90 4 42,960 1,502 15.9 5 -30.4
IYY 5.7 3.1 6.8 18.8 17.3 10.4 2.4 1.5 1.0 90 4 41,915 1,245 15.3 7 -31.1
IWB 5.7 3.5 6.7 18.9 17.2 10.4 2.4 1.5 1.0 91 4 45,993 1,008 15.7 5 -30.9
IWV 4.6 -22.5 6.7 18.1 17.3 10.4 2.4 1.5 1.0 85 4 34,564 2,985 14.5 5 -31.3
OEF 6.0 0.1 6.3 21.1 16.4 10.0 2.4 1.7 1.0 100 4 128,532 101 28.9 5 -26.2
MOAT 6.9 12.4 3.4 18.7 17.3 11.8 2.4 1.7 0.9 100 7 35,000 20 51.5 0
SCHB 5.3 3.0 6.9 18.3 17.3 10.4 2.4 1.5 1.0 86 4 36,128 1,946 14.6 5 -15.0
SCHD 6.3 2.0 5.4 26.9 16.6 11.0 3.5 1.6 1.0 97 1 74,859 101 41.4 17
SCHX 5.8 3.2 6.8 19.2 17.2 10.4 2.4 1.6 1.0 94 4 50,998 764 16.4 4 -14.3
SPY 6.8 2.9 6.6 19.7 17.2 10.3 2.4 1.5 1.0 98 4 61,471 501 18.0 4 -29.6
g VIG 8.0 7.5 6.6 25.6 16.0 10.9 3.1 1.3 1.0 94 4 47,884 149 39.4 15 -21.9
VV 6.8 3.2 6.6 19.6 16.7 9.9 2.3 1.5 1.0 95 4 52,164 644 17.4 8 -30.4
MGC 6.1 2.4 6.5 20.4 16.4 9.7 2.3 1.5 1.0 99 4 75,559 292 21.0 19 -28.8
VONE 6.0 4.4 6.4 19.2 16.8 9.8 2.3 1.4 1.0 92 4 43,654 996 16.3 36
VTHR 5.6 3.9 6.6 18.5 16.8 9.8 2.3 1.4 1.0 86 4 33,027
2,964 15.0 20
VOO 7.9 2.9 6.4 19.8 16.6 9.7 2.3 1.5 1.0 98 4 58,058 508 18.4 3
VTI 5.2 3.0 6.8 18.5 16.8 9.8 2.3 1.4 1.0 86 4 32,637 3,250 15.0 3 -31.1

12.4 1.3
15.4 1.2
13.3 1.3
13.6 1.3
13.8 1.3
13.7 1.3
14.0 1.2
12.8 1.3

13.9 1.3

13.5 1.3
13.3 1.3
11.5 1.4
13.6 1.3
13.2 1.3



14.1 1.3

Lg Val
HDV 0.4 2.4 2.9 19.9 18.6 9.1 2.8 2.0 1.0 98 1 83,434 77 57.3 43
USMV 5.9 7.0 4.2 22.2 17.2 10.8 2.9 1.7 1.0 94 4 34,655 134 15.5 30
IWD 2.5 -0.1 3.3 12.7 14.8 8.3 1.7 1.3 1.0 92 1 48,576 649 27.2 16 -28.8
IWW 2.5 -9.0 3.3 12.2 14.9 8.3 1.7 1.2 1.0 85 1 36,028
1,981 25.0 16 -29.1
IVE 1.7 -0.2 2.2 15.4 15.9 8.6 1.9 1.2 1.0 97 1 55,709 358 25.9 35 -30.1
PRF 1.1 0.0 2.6 15.6 16.0 8.4 1.9 1.0 1.0 91 1 40,490
1,020 18.5 13 -31.4
e SPLV
5.1 2.4 2.1 18.6 19.3 9.2 2.4 1.5 1.1 99 1 23,440 100 12.6 17
SCHV 1.2 -1.6 3.0 18.1 15.7 9.1 2.0 1.4 1.0 95 1 56,292 356 27.4 8 -13.4
DIA 9.3 7.0 5.4 28.1 15.7 10.4 3.0 1.4 1.0 100 1 130,491 31 54.0 6 -22.8
SDY 6.1 4.6 4.8 21.6 19.5 11.2 2.9 1.3 1.0 84 4 20,083 84 20.6 94 -25.5
VYM 3.3 2.7 3.6 19.7 15.5 8.7 2.3 1.5 1.0 95 1 69,067 397 41.3 11 -24.7
MGV 0.0 -2.3 2.4 14.7 15.0 7.8 1.7 1.3 1.0 99 1 77,969 164 35.0 17 -25.5
VONV 2.1 1.3 3.2 12.5 15.1 8.0 1.6 1.2 1.0 91 1 41,337 701 26.9 29
VOOV 3.3 -0.1 2.2 15.6 15.3 8.1 1.8 1.1 1.0 98 1 52,076 359 26.0 20
VTV 0.6 -0.8 3.6 14.3 15.0 7.9 1.7 1.2 1.0 94 1 50,596 417 28.8 22 -27.2
DTN -1.5 0.7 0.3 17.8 17.7 8.4 2.5 1.3 1.0 99 1 29,216 84 17.9 34 -26.5
DHS -0.2 -0.5 1.6 16.7 18.5 8.2 2.4 1.7 1.0 91 1 47,105 351 42.4 28 -30.6
DLN 5.8 3.9 4.1 20.4 16.8 9.3 2.5 1.5 1.0 99 1 77,849 299 26.7 14 -25.7
DTD 4.6 3.8 4.0 19.3 16.9 9.2 2.4 1.5 1.0 91 1 49,321 930 22.6 13 -26.6

13.9 1.3
14.1 1.2
14.3 1.2
14.1 1.3

12.4 1.4
11.9 1.4
11.1 1.5
10.8 1.7
13.2 1.3


13.5 1.3
10.4 1.8
9.6 1.9
10.6 1.7
10.9 1.6

Lg Grw
RPG 24.5 10.5 23.0
IWF 12.0 10.0 11.2
IWZ 9.4 -33.1 11.2
IWY 12.1 10.7 11.8
IVW 13.9 9.8 12.6
QQQ 20.0 14.7 15.8
SCHG 14.1 10.9 11.9
SPYG 13.9 9.8 12.6
VUG 15.3 10.4 11.2
MGK 15.6 11.3 12.5
VONG 13.7 10.4 10.9
VOOG 14.3 9.7 12.4

16.1 1.3
13.9 1.3
14.3 1.2
13.1 1.3
12.8 1.4
15.5 1.2
15.3 1.1
13.3 1.3
14.3 1.2
13.9 1.3

23.1 18.8 12.2

25.4 20.4 12.8
24.2 20.6 12.9
27.8 19.1 12.3
24.0 18.7 12.4
21.2 17.4 12.4
20.3 18.9 11.9
24.0 18.7 12.4
25.1 18.9 12.4
26.5 18.3 12.2
26.7 19.0 12.1
23.9 18.1 11.7

3.2
4.5
4.4
4.4
3.4
3.6
3.2
3.4
3.8
3.8
4.3
3.2

1.9
1.9
1.9
2.0
2.3
2.4
1.8
2.3
1.8
1.8
1.9
2.2

1.1 92
1.0 91
1.0 85
1.0 100
1.0 98
1.0 97
1.0 93
1.0 98
1.0 94
1.0 98
1.0 93
1.0 98

7
7
7
7
7
7
7
7
7
7
7
7

20,963 111 19.6 35 -35.5

43,444 612 21.1 17 -32.9
33,008
1,708 19.5 18 -33.4
90,211 123 31.3 16 -12.3
67,603 296 24.7 28 -29.2
73,033 101 48.8 9 -38.6
45,991 410 24.5 8 -15.5
67,605 296 24.7 21 -33.0
45,355 417 22.9 21 -33.3
67,209 179 28.0 16 -31.7
46,780 579 24.3 25
64,408 293 25.0 22

MC Blnd
IJH 8.3 5.2 9.4 13.6 20.4 11.4 2.3 1.2 47 5 4,265 403 7.2 9 -36.5 16.5 1.1
IWR 6.0 6.4 5.7 15.1 18.2 10.8 2.4 1.3 1.1 73 5 8,809 810 4.1 13 -38.7 15.6 1.2
SCHM 4.2 4.6 9.0 13.6 18.5 10.0 2.3 1.2 50 5 4,925 585 4.3 19
Data through July 31, 2013.

20

Historical Performance

Nuts and Bolts

ETF Watchlist Domestic Equity

NAV Return % Trailing
NAV Rtn % Ann. Tax
Current
Total
Daily
Exp.
Est.
Star
Cost
Yield Market
Assets Vol.
Ratio Holding Inception
Rating
YTD
1Mo
3Mo
1Yr
3Yr
Ratio % %
Price $
($Mil)
(Thou)
%
Costs Date

SPDR S&P MidCap 400 MDY

Vanguard Extended Market Index ETF VXF
Vanguard Mid-Cap ETF VO
Vanguard S&P Mid-Cap 400 Index ETF IVOO
WisdomTree MidCap Earnings EZM

QQQQ 21.5
QQQQ 23.8
QQQ 22.1
NR
21.6
QQQQQ 24.6

6.2 6.5
7.0 8.9
5.7 6.3
6.2
6.6
7.2 10.2

32.6 18.8 0.40

35.6 19.6 0.29
32.1 18.5 0.29
32.8


40.4 21.0 0.53

1.1 224.11 14,322 1,953 0.25 0.31 05-04-95

1.3 74.80 2,551 209 0.10 0.10 12-27-01
1.2 100.58 5,562 248 0.10 0.01 01-26-04
0.9
82.83
195
15 0.15
09-07-10
1.5 77.31 286 32 0.38 02-23-07

Mid-Cap Value
iShares Dow Jones Select Dividend Index DVY
iShares Russell Midcap Value Index IWS
iShares S&P MidCap 400 Value Index IJJ
Vanguard Mid-Cap Value ETF VOE
Vanguard S&P Mid-Cap 400 Value Index ETF IVOV
WisdomTree MidCap Dividend DON

QQQQ
QQQQ
QQQQ
QQQQ
NR
QQQQ

20.0
22.1
23.2
23.3
23.1
22.4

5.5
5.3
6.3
5.5
6.3
6.2

4.1
5.8
7.3
6.1
7.3
5.5

22.1 18.3 0.76

33.4 18.5 0.50
35.1 18.4 0.41
33.5 18.1 0.46
35.1


30.6 18.9 1.10

3.2 67.54 12,768

1.9 60.78 5,193
1.7 107.81 3,271
1.6 72.54 1,798
1.3
81.13
28
3.1 69.43 746

Mid-Cap Growth
Guggenheim S&P Midcap 400 Pure Growth RFG
iShares Russell Midcap Growth Index IWP
iShares S&P MidCap 400 Growth Index IJK
Vanguard Mid-Cap Growth ETF VOT
Vanguard S&P Mid-Cap 400 Growth Idx ETF IVOG

QQQQQ 19.2
QQQ 21.7
QQQQ 20.0
QQQ 20.5
NR
20.0

6.6
6.2
6.1
5.8
6.1

6.8
7.6
5.8
6.6
5.8

30.5 21.3 0.15

30.5 19.1 0.24
30.5 19.5 0.22
30.3 18.7 0.09
30.5

0.9 108.31 639 30 0.35 03-01-06

1.1 76.14 3,956 287 0.25 0.16 07-17-01
1.0 136.79 3,973 166 0.25 0.18 07-24-00
0.6 82.71 1,664 75 0.10 1.30 08-17-06
0.6
84.55
185
16 0.20
09-07-10

Small-Cap Blend
iShares Core S&P Small-Cap ETF IJR
iShares Russell 2000 Index IWM
PowerShares FTSE RAFI US 1500 Small-Mid PRFZ
Schwab U.S. Small-Cap ETF SCHA
Vanguard Russell 2000 Index ETF VTWO
Vanguard S&P Small-Cap 600 Index ETF VIOO
Vanguard Small Cap ETF VB

QQQQ
QQQ
QQQQ
QQQQ
NR
NR
QQQQ

24.2
24.0
25.5
24.5
24.0
24.1
23.7

6.8 11.4
7.0 10.7
6.9 12.3
7.0 10.6
7.0
10.7
6.8
11.3
6.7 9.5

34.8 20.4 0.34

34.8 18.7 0.46
39.6 19.1 0.46
36.2 20.1 0.53
34.7


34.6


35.2 19.9 0.35

1.3 96.50 11,667 1,003 0.17 0.03 05-22-00

1.7 103.66 25,449 37,473 0.20 0.03 05-22-00
1.5 86.89 691 38 0.39 0.22 09-20-06
1.6 47.12 1,461 309 0.13 0.02 11-03-09
1.3
83.03
258
52 0.15
09-20-10
1.2
87.11
83
7 0.15
09-07-10
1.5 100.07 7,130 381 0.10 1.02 01-26-04

Small-Cap Value
iShares Russell 2000 Value Index IWN
iShares S&P SmallCap 600 Value Index IJS
Vanguard Russell 2000 Value Index ETF VTWV
Vanguard S&P Small-Cap 600 Value Idx ETF VIOV
Vanguard Small Cap Value ETF VBR
WisdomTree SmallCap Dividend DES

QQ
QQQ
NR
NR
QQQ
QQQQ

21.6
24.0
21.6
24.0
23.1
24.9

6.4 9.1
6.4 11.0
6.4
9.1
6.4
11.0
6.7 8.7
7.5 10.4

33.9 16.9 0.60

37.1 19.6 0.37
33.9


37.1


35.2 18.1 0.55
35.9 18.7 1.32

2.2 90.98 5,760 936 0.25 0.15 07-24-00

1.4 99.57 2,659 146 0.25 0.19 07-24-00
1.6
79.29
47
5 0.20
09-20-10
1.1
85.64
30
4 0.20
09-07-10
2.1 89.43 3,346 138 0.10 2.90 01-26-04
3.2 62.66 814 102 0.38 06-16-06

Small-Cap Growth
iShares Russell 2000 Growth Index IWO
iShares S&P SmallCap 600 Growth IJT
Vanguard Russell 2000 Growth Index ETF VTWG
Vanguard S&P Small-Cap 600 Gr Idx ETF VIOG
Vanguard Small Cap Growth ETF VBK

QQQ
QQQQ
NR
NR
QQQ

26.4
24.2
26.3
24.1
23.4

7.6 12.3
7.2 11.6
7.6
12.4
7.3
11.6
6.7 10.4

35.5 20.4 0.27

32.3 21.1 0.27
35.3


32.1


34.3 21.2 0.12

1.2 120.00 5,709 1,180 0.25 0.13 07-24-00

1.1 104.00 2,350 190 0.25 0.04 07-24-00
0.6
87.58
70
7 0.20
09-20-10
0.9
89.13
22
2 0.20
09-07-10
0.9 109.93 3,115 137 0.10 1.62 01-26-04

Communications
iShares Dow Jones US Telecom IYZ
iShares S&P Global Telecommunications IXP
Vanguard Telecom Services ETF VOX

QQQ 16.7 7.8 5.2 20.8 14.4 0.63 2.7 27.93

QQQ 10.0 3.2 -2.0 7.4 10.0 1.04 4.1 61.21
QQQQ 17.5 4.3 2.5 20.0 16.0 0.47 3.0 82.26

Consumer
Consumer Discret Select Sector SPDR XLY
Consumer Staples Select Sector SPDR XLP
iShares Dow Jones US Consumer Goods IYK
iShares Dow Jones US Consumer Services IYC
iShares Dow Jones US Home Construction ITB
iShares S&P Global Cons Discretionary RXI
iShares S&P Global Consumer Staples KXI
SPDR S&P Homebuilders XHB
SPDR S&P Retail XRT
Vanguard Consumer Discretionary ETF VCR
Vanguard Consumer Staples ETF VDC

QQQQ
QQQQ
QQQQ
QQQQ
QQ
QQ
QQQ
QQ
QQQQ
QQQQ
QQQQ

25.9 5.2 9.1

19.8 4.2 1.5
21.4 4.2 3.7
25.2 5.7 8.5
5.3 -0.5 -8.3
23.1 6.1 8.6
14.1 3.8 -1.6
13.4 2.2 -0.6
31.5 6.7 11.6
26.4 5.5 9.7
21.1 4.5 2.6

38.4 25.6 0.51

19.4 18.7 0.93
26.2 18.9 0.45
34.7 25.1 0.28
37.9 24.7 0.12
37.9 20.5 0.36
17.3 16.4 0.57
44.0 27.6 0.38
40.4 30.5 0.43
40.7 25.7 0.19
21.2 19.2 0.38

i Income Portfolio Holding g Asset-Allocation Portfolio Holding e Both Income and Asset-Allocation Holding

1.4 59.37
2.7 41.39
1.9 90.44
1.2 108.34
0.5 22.28
1.4 75.08
2.4 83.01
0.5 30.09
1.3 81.68
1.2 96.03
2.4 106.62

979 0.40 0.28 11-03-03

483 0.25 0.24 07-17-01
153 0.25 0.21 07-24-00
130 0.10 0.05 08-17-06
5 0.20
09-07-10
78 0.38 06-16-06

488 502 0.46 0.43 05-22-00

480 42 0.48 0.71 11-12-01
551 75 0.14 09-23-04
7,024 5,927 0.18 0.26 12-16-98
6,761 11,170 0.18 0.23 12-16-98
470 23 0.46 06-12-00
444 30 0.46 06-12-00
1,906 6,830 0.46 0.48 05-01-06
259 37 0.48 09-12-06
596 29 0.48 09-12-06
2,251 7,865 0.35 0.32 01-31-06
1,181 3,076 0.35 0.23 06-19-06
1,018 115 0.14 0.13 01-26-04
1,546 72 0.14 0.14 01-26-04

Risk
Fundamentals
Valuation
Portfolio Style

5Yr Historical Growth % Price/ Price/
Covrg Average Assets Worst
3 Yr
3 Yr



Price/
Cash
Price/
Price/
Fair
Rate
Style
Mrkt Cap
# of
in Top Turnover
3Mo
Standard Sharpe
Ticker
Earnings Sales
Cash Flow ROE
Earn
Flow
Book
Sales
Value %
Box
($Mil)
Holdgs
10 %
%
Return % Deviation Ratio

MDY 8.6 5.2 9.5 13.5 19.3 10.8 2.2 1.2 48 5

VXF -3.0 -21.9 8.8 11.9 18.3 10.2 2.2 1.1 36 9
VO 11.6 6.5 6.8 15.6 18.5 10.7 2.4 1.3 1.1 79 5
IVOO 9.0 5.4 9.6 14.8 19.7 10.6 2.2 1.2 49 5
EZM 14.7 5.4 9.2 16.9 13.0 8.3 2.0 0.9 38 5

7.3 14 -36.6
4.8 12 -38.3
5.9 17 -38.3
7.7 13
7.8 39 -34.7

16.5 1.1
17.5 1.1
15.9 1.2

17.2 1.2

13,355 103 21.0 13 -30.1

8,106 521 7.5 23 -36.7
3,666 295 9.5 38 -34.7
6,864 255 8.8 33 -34.7
3,495 298 9.3 31
5,081 366 12.3 33 -32.6

9.9 1.7
15.0 1.2
16.8 1.1
15.1 1.2

13.2 1.4

4,164 94 21.9 56 -36.1

9,495 490 7.1 25 -40.7
4,967 227 13.9 46 -38.4
7,848 239 10.0 38 -42.0
4,839 227 14.1 26

17.0 1.2
16.5 1.1
16.6 1.2
17.2 1.1

SC Blnd
IJR 7.0 4.6 7.6 11.7 20.8 11.7 2.1 1.2 12 6
IWM -9.8 -61.0 6.6 8.0 19.3 10.9 2.1 1.1 11 6
PRFZ -7.2 -60.3 0.4 9.0 18.2 8.9 1.8 0.8 13 6
SCHA 0.7 -42.8 7.0 10.2 18.9 10.2 2.1 1.1 20 6
VTWO 0.3 0.0 9.2 9.6 17.9 9.7 2.0 1.1 13 6
VIOO 7.0 4.6 8.6 11.9 19.8 10.7 2.0 1.1 14 6
VB -0.6 2.1 8.9 11.8 18.3 9.8 2.0 1.1 28 6

1,382 602
1,252 1,981
1,141 1,480
1,785 1,773
1,209 1,974
1,271 601
2,294 1,443

5.5 12 -34.3
2.6 19 -35.6
2.4 30 -37.7
2.3 12 -21.5
3.0 35

5.3 12
3.1 14 -37.0

17.4 1.2
18.6 1.0
19.0 1.0
18.3 1.1


18.1 1.1

SC Val
IWN -2.2 -29.4 3.2 5.9 16.0 8.3 1.4 0.9 10 3
IJS 2.0 3.5 6.5 8.3 19.0 9.4 1.7 0.8 12 3
VTWV 1.0 -0.9 4.8 6.2 15.5 7.8 1.4 0.9 10 3
VIOV 2.6 3.5 7.2 8.9 17.6 8.4 1.6 0.8 13 6
VBR 0.3 0.2 6.7 8.9 15.1 7.7 1.5 0.9 23 3
DES 2.5 2.2 5.3 11.5 18.5 8.7 2.0 1.0 13 3

1,094 1,355 4.2 29 -32.5

1,250 445 8.4 44 -33.0
1,042 1,419 4.6 40

1,127 445 8.6 29
1,701 1,009 8.1 25 -33.6
1,226 634 12.1 49 -28.8

17.6 1.0
17.9 1.1


17.1 1.1
15.0 1.2

SC Grw
IWO -16.2 -70.8 11.7
IJT 15.3 7.6 9.5
VTWG 2.0 1.6 14.9
VIOG 15.0 7.6 11.1
VBK 7.0 4.7 10.0

1,430 1,129 4.9 32 -38.9

1,533 354 10.6 47 -35.5
1,413 1,124 5.7 51

1,433 352 10.1 45
1,850 953 8.1 37 -40.5

19.7 1.0
17.1 1.2


19.2 1.1

MC Val
DVY 6.3 -0.7 1.5 20.3 16.6 8.2 2.3 1.3 1.1 80 2
IWS 3.6 5.0 2.5 9.6 14.2 8.0 1.6 1.1 1.0 71 2
IJJ 1.3 4.1 3.4 10.8 18.9 9.3 1.8 0.9 43 2
VOE 3.9 5.2 9.8 12.2 15.4 7.9 1.7 1.0 1.0 70 2
IVOV 2.0 4.3 3.6 10.9 17.9 8.8 1.7 0.9 44 2
DON 2.1 3.7 3.0 14.3 17.9 8.0 2.2 1.1 62 2
MC Grw
RFG 27.8
IWP 11.8
IJK 19.5
VOT 14.5
IVOG 20.2

9.3 26.0
8.7 9.7
7.8 19.2
6.6 5.4
7.9 19.2

16.4 18.8 13.5

20.3 23.9 14.2
16.3 22.2 14.2
18.8 22.3 13.4
18.7 21.8 13.1

10.1 24.3 14.1

15.4 22.9 15.4
13.2 21.1 11.9
15.0 22.4 14.5
12.9 21.5 12.4

2.9
4.6
3.3
3.7
3.2

3.9
2.8
3.5
2.7
3.0

1.6
1.8
2.0
1.7
1.9

1.5
1.9
1.3
1.8
1.3

1.1

1.1

48
75
51
75
53

12
12
15
14
24

8
8
8
8
8

9
9
9
9
9

4,033 400
2,826 3,052
8,680 368
4,117 402
3,413 610

Comm
IYZ -25.9 3.5 -6.0 -1.7 29.7 4.8 2.1 0.9 1.0 68 2 6,580 26 61.1 40 -30.4 15.2 1.0
IXP -17.3 1.1 -0.5 13.9 19.2 4.7 1.9 1.3 66 1 75,532 48 71.8 7 -25.1 12.2 0.8
VOX -18.9 2.0 -1.5 -1.5 26.5 4.5 2.2 0.9 1.0 72 1 17,000 35 71.0 28 -26.6 13.0 1.2
Consmr
XLY
XLP
IYK
IYC
ITB
RXI
KXI
XHB
XRT
VCR
VDC

2.1
4.6
-5.1
14.5
78.3
7.7
-8.8
26.1
17.0
4.2
2.7

7.5 12.0
8.2 6.0
3.7 8.5
9.5 9.6
2.7 67.1
4.4 4.8
5.6 7.0
3.5 15.3
5.1 11.3
6.9 11.7
6.5 6.9

Data through July 31, 2013.

23.1 19.0 12.7

27.8 19.8 14.0
28.8 19.3 14.2
21.1 18.6 12.1
14.0 18.4 15.9
19.7 17.0 11.3
24.6 18.9 12.5
15.8 19.4 17.4
16.9 18.6 11.4
22.9 17.3 11.3
26.6 19.7 13.3

3.7
3.9
3.8
3.5
2.5
2.5
3.4
3.0
3.0
3.3
3.6

1.4
1.1
1.4
1.0
1.2
1.0
1.1
1.2
0.5
1.2
1.0

1.1
1.0
1.0
1.1


1.0


1.0
1.0

97
99
89
90
63
64
72
40
55
82
92

7
4
4
7
5
7
7
8
8
7
4

39,673 84 45.8 5 -32.5

69,718 41 64.9 12 -17.6
40,489 120 53.4 7 -20.0
34,580 183 39.1 9 -30.5
5,058 33 60.7 17 -43.1
36,134 181 30.8 8 -34.1
67,657 114 43.9 6 -17.8
4,219 36 35.5 46 -39.6
4,482 98 12.2 39 -42.7
21,300 370 33.6 6 -35.9
53,331 110 61.8 7 -15.3

14.0 1.7
9.3 1.9
10.1 1.8
12.9 1.8
25.6 1.0
15.8 1.3
10.8 1.5
23.0 1.2
17.6 1.6
15.2 1.6
9.2 2.0

22

Historical Performance

Nuts and Bolts

ETF Watchlist Domestic Equity

NAV Return % Trailing
NAV Rtn % Ann. Tax
Current
Total
Daily
Exp.
Est.
Star
Cost
Yield Market
Assets Vol.
Ratio Holding Inception
Rating
YTD
1Mo
3Mo
1Yr
3Yr
Ratio % %
Price $
($Mil)
(Thou)
%
Costs Date

Energy
Energy Select Sector SPDR XLE
iShares Dow Jones US Energy IYE
iShares Dow Jones US Oil & Gas Ex Index IEO
iShares S&P Global Energy IXC
JPMorgan Alerian MLP Index ETN AMJ
Market Vectors Oil Services ETF OIH
SPDR S&P Oil & Gas Exploration & Prod XOP
Vanguard Energy ETF VDE

QQQQQ 16.5 5.1

QQQQQ 15.9 5.2
QQQQ 18.6 4.8
QQQQ 7.1 5.4
QQQQQ 22.8 -0.6
NR
16.1
4.8
QQQQ 16.1 7.1
QQQQQ 15.6 5.2

Financial
Financial Select Sector SPDR XLF
iShares Dow Jones US Financial Sector IYF
iShares Dow Jones US Financial Services IYG
iShares S&P Global Financials IXG
SPDR S&P Bank ETF KBE
SPDR S&P Regional Banking ETF KRE
Vanguard Financials ETF VFH

Q
QQ
Q
QQ
Q
QQQ
QQ

5.7
5.5
6.1
2.1
0.3
4.8
9.0
5.6

20.7 17.2 0.57

19.3 16.7 0.35
26.2 15.2 0.17
11.0 10.6 0.57
20.5 16.9 1.83
15.9


23.4 16.6 0.36
19.2 16.4 0.24

1.7 82.42
1.6 46.94
0.9 75.05
2.5 40.29
4.6 46.26
0.9
44.84
1.3 62.35
1.7 118.31

5.4 9.9
4.8 8.1
6.6 14.0
6.1 2.5
9.0 18.7
8.7 18.9
5.2 8.0

42.1 13.5 0.55

37.5 14.1 0.37
48.9 14.0 0.25
35.8 8.3 0.61
47.1 10.8 0.59
39.3 17.8 0.62
37.9 13.8 0.44

1.5 20.49 16,732 49,792 0.18 12-16-98

1.4 74.98 1,226 405 0.46 0.49 05-22-00
1.0 76.23 582 103 0.46 06-12-00
2.2 51.42 306 59 0.48 11-12-01
1.7 31.24 2,541 1,605 0.35 0.43 11-08-05
1.6 36.80 2,200 3,588 0.35 0.41 06-19-06
1.9 41.94 1,521 266 0.14 0.09 01-26-04

Health Care
Health Care Select Sector SPDR XLV
iShares Dow Jones US Healthcare IYH
iShares Nasdaq Biotechnology IBB
iShares S&P Global Healthcare IXJ
SPDR S&P Biotech XBI
SPDR S&P Pharmaceuticals XPH
Vanguard Health Care ETF VHT

QQQ 28.9 7.3 8.3

QQQ 29.7 7.6 8.4
QQQQ 44.3 13.9 14.9
QQQ 23.8 5.5 4.2
QQQ 39.2 17.3 15.7
QQQQQ 36.6 8.1 15.6
QQQ 29.7 7.7 9.0

35.4 23.8 0.66

36.2 24.3 0.33
48.4 35.2 0.07
31.0 21.7 0.49
36.4 30.9 0.04
34.1 26.0 0.44
36.4 24.5 0.25

1.6 51.02
1.3 107.71
0.3 197.83
1.8 78.79
0.2 122.57
1.5 76.21
1.3 92.99

Industrials
Industrial Select Sector SPDR XLI
iShares Dow Jones US Industrial IYJ
iShares S&P Global Industrials EXI
Vanguard Industrials ETF VIS

QQQ
QQQ
Q
QQQ

5.8
6.0
5.6
6.1

9.5
8.7
5.2
9.7

29.0 16.7 0.71

31.1 18.1 0.34
26.2 12.8 0.49
32.7 17.8 0.26

2.0 45.16 5,679 10,701 0.18 12-16-98

1.4 87.91 1,183 251 0.46 0.44 06-12-00
1.9 62.33 246 37 0.48 09-12-06
1.7 86.62 1,014 124 0.14 0.08 09-23-04

Natural Resources
FlexShares Mstar Gbl Upstrm Nat Res ETF GUNR
iShares Dow Jones US Basic Materials IYM
iShares North American Natural Resources IGE
iShares S&P Global Materials MXI
Market Vectors Agribusiness ETF MOO
Materials Select Sector SPDR XLB
SPDR S&P Metals & Mining XME
Vanguard Materials ETF VAW

NR
-8.3
2.7
QQQ
3.5 5.8
QQQQ 7.5 5.8
QQ
-8.3 4.8
QQQ -5.8 -2.7
QQQQ 9.0 5.6
Q
-20.4 7.4
QQQQ 8.7 5.7

-6.1
2.2
3.9
-3.5
-8.2
3.1
-3.7
3.2

-2.1


13.9 7.9 0.45
12.8 8.8 0.34
3.7 1.0 0.55
2.2 7.6 0.36
19.0 11.2 0.83
-9.2 -9.5 0.39
20.6 13.2 0.31

1.1
32.35
2.2 71.02
1.7 40.58
2.6 56.03
2.0 49.81
2.4 40.48
1.7 35.67
1.7 91.52

Real Estate
Schwab US REIT ETF SCHH
SPDR Dow Jones REIT RWR
Vanguard REIT Index ETF VNQ

NR
QQ
QQQ

Technology
iShares Dow Jones US Technology IYW
iShares S&P Global Technology IXN
Technology Select Sector SPDR XLK
Vanguard Information Technology ETF VGT

QQQ
9.8 4.9
QQ
8.2 3.4
QQQQ 10.7 3.7
QQQ 12.7 5.3

5.2 9.3 12.6 0.20 1.1 77.25 2,317 379 0.46 0.16 05-15-00
2.6 12.1 11.6 0.25 1.2 72.35 546 36 0.48 0.59 11-12-01
3.5 10.4 14.9 0.54 1.8 31.73 11,281 8,593 0.18 12-16-98
6.3 14.1 14.7 0.13 1.1 78.01 3,400 233 0.14 0.13 01-26-04

Utilities
iShares Dow Jones US Utilities IDU
iShares S&P Global Utilities JXI
Utilities Select Sector SPDR XLU
Vanguard Utilities ETF VPU

QQQ
Q
QQQ
QQQ

-3.0 10.1 14.2 0.74 3.1 98.63 1,149 528 0.46 0.45 06-12-00
-3.3 10.4 4.6 0.98 4.1 43.78 228 27 0.48 09-12-06
-4.3 7.8 13.5 1.32 3.8 39.26 5,899 11,184 0.18 12-16-98
-3.2 10.6 14.4 0.62 3.6 85.83 1,430 164 0.14 0.15 01-26-04

25.8
23.9
29.0
15.3
32.3
32.5
24.0

20.2
20.7
14.9
21.5

6.4
0.8
-7.0
6.3 0.7 -7.0
7.2 0.8 -7.0

16.1
9.9
14.5
16.0

4.3
4.2
4.2
4.5

8,197 10,741 0.18 12-16-98

1,357 536 0.46 0.24 06-12-00
360 86 0.46 0.45 05-01-06
974 122 0.48 0.60 11-12-01
5,744 820 0.85 5.22 04-02-09
1,478 3,305 0.35
12-20-11
854 3,429 0.35 0.22 06-19-06
2,278 96 0.14 0.11 09-23-04

7,380 8,433 0.18 12-16-98

1,545 241 0.46 0.50 06-12-00
3,738 782 0.48 0.28 02-05-01
814 70 0.48 0.75 11-13-01
992 332 0.35 0.12 01-31-06
510 88 0.35 06-19-06
1,944 177 0.14 0.11 01-26-04

2,447
342 0.48
09-16-11
511 118 0.46 0.40 06-12-00
2,005 367 0.48 0.53 10-22-01
383 34 0.48 0.64 09-12-06
4,656 368 0.54 08-31-07
2,831 6,136 0.18 12-16-98
572 3,207 0.35 0.20 06-19-06
791 49 0.14 0.11 01-26-04

6.3


2.2
32.31
579
153 0.10
01-13-11
6.2 14.4 1.13 3.0 76.50 2,239 236 0.25 0.28 04-23-01
7.8 14.9 1.31 3.6 69.34 18,108 3,942 0.10 0.05 09-23-04

i Income Portfolio Holding g Asset-Allocation Portfolio Holding e Both Income and Asset-Allocation Holding

Fundamentals

Valuation

Portfolio Style

23

Risk

5Yr Historical Growth % Price/ Price/
Covrg Average Assets Worst
3 Yr
3 Yr



Price/
Cash
Price/
Price/
Fair
Rate
Style
Mrkt Cap
# of
in Top Turnover
3Mo
Standard Sharpe
Ticker
Earnings Sales
Cash Flow ROE
Earn
Flow
Book
Sales
Value %
Box
($Mil)
Holdgs
10 %
%
Return % Deviation Ratio

Energy
XLE 10.2 3.8 5.9 14.7 13.5 7.2 1.9 1.0 0.9 99 1 60,827 44 60.7 5 -32.1
IYE 10.4 2.4 6.3 16.3 12.6 7.2 2.0 1.1 0.9 93 1 66,506 82 63.8 9 -30.5
IEO 6.7 11.2 10.6 9.2 15.4 5.6 1.9 0.9 0.9 84 1 19,714 61 62.4 13 -40.0
IXC 1.2 4.2 4.2 15.1 11.0 6.4 1.5 0.8 0.9 78 1 74,713 98 51.7 6 -30.7
AMJ 0 0
0 -9.3
OIH 2.6 13.0 13.4 14.2 17.1 10.5 1.8 1.7 0.9 88 7 19,208 26 67.5 6
XOP 6.3 8.6 5.5 8.2 14.0 4.8 1.8 0.8 45 5 5,014 72 16.5 42 -43.3
VDE 11.0 3.0 5.2 16.3 12.5 6.9 1.9 1.0 0.9 90 1 52,501 170 59.5 12 -33.8

21.6 0.8
20.6 0.9
27.1 0.7
20.0 0.6
14.7 1.1

28.3 0.7
21.3 0.8

Fin
XLF 9.5 -9.4 43.4 10.7 16.3 1.3 2.0 1.0 95 1
IYF 6.9 -7.8 29.2 11.6 15.9 1.4 2.1 1.0 84 1
IYG 14.5 -4.7 44.6 13.6 14.8 1.4 2.7 1.1 93 1
IXG 1.6 -2.2 -32.3 10.6 13.8 1.2 1.5 65 1
KBE 10.6 5.6 8.5 7.4 1.3 1.9 62 2
KRE 13.2 2.0
-33.5 10.0 8.6 1.4 2.2 37 2
VFH 6.6 -8.5 32.9 10.3 15.1 1.2 2.0 1.0 78 1

59,332 82 51.2 8 -39.8

37,320 261 40.4 10 -37.1
56,137 108 60.3 7 -42.1
50,206 232 25.7 5 -42.0
7,542 47 23.4 55 -50.2
2,965 78 18.6 44 -37.6
23,076 521 35.5 7 -36.0

19.5 0.7
17.9 0.8
21.4 0.7
20.6 0.5
21.7 0.6
22.9 0.8
18.4 0.8

Hlth Cr
XLV 5.2 9.4 5.5 20.1 20.8 14.8 3.4 1.6 1.0 100 7
IYH 4.9 10.2 6.8 18.5 20.8 14.7 3.4 2.1 1.0 94 7
IBB 16.9 12.4 9.9 10.9 28.3 20.5 6.2 6.7 1.0 74 8
IXJ 3.3 7.1 1.0 24.5 20.8 14.6 3.3 2.0 1.0 82 7
XBI 64.2 7.4 2.6 -13.3 6.4
10.5 39 9
XPH -0.1 8.8 1.2 14.5 20.6 15.1 4.3 3.5 59 8
VHT 5.5 9.0 5.7 18.4 19.3 12.6 3.1 1.5 1.0 91 7

62,987 55 56.7 5 -23.0

49,665 113 52.7 6 -24.1
11,624 125 54.9 14 -34.1
68,089 97 47.4 6 -22.7
2,843 57 24.3 61 -24.2
8,337 31 40.9 31 -17.3
36,416 290 49.0 9 -24.5

11.6 1.9
12.0 1.9
16.9 1.9
11.8 1.7
22.9 1.3
13.7 1.8
12.3 1.9

Indstrls
XLI 11.1 6.0 3.6 22.1 18.0 11.6
IYJ 10.8 6.0 4.6 21.2 19.2 12.1
EXI 7.1 -6.1 1.7 17.5 17.2 10.3
VIS 8.3 5.0 4.8 20.5 17.5 10.7

40,224 62 49.2
24,862 223 36.7
29,478 201 28.4
21,536 359 40.2

8 -33.8
7 -35.7
8 -36.0
6 -35.7

16.9 1.0
17.3 1.1
17.2 0.8
17.6 1.0

33,398 153 39.2 5

17,511 60 60.4 8 -51.0
31,116 141 41.4 8 -39.0
24,693 128 34.4 7 -47.7
14,866 51 57.6 19 -51.4
23,035 32 66.2 12 -40.9
2,134 40 34.6 32 -62.9
12,658 136 46.6 7 -44.9

22.8 0.4
22.0 0.5
22.3 0.2
20.0 0.5
19.9 0.6
30.8 -0.2
20.5 0.7

3.2
3.2
2.3
2.9

1.4
1.3
1.0
1.2

1.0
1.0

1.0

98
87
57
84

4
4
4
4

Nt Rsrc
GUNR 1.4 4.6 -2.2 13.7 11.8 6.9 1.5 0.8 1.0 75 1
IYM 4.0 -1.7 -0.8 20.8 17.0 9.7 2.3 1.2 1.0 80 1
IGE 0.8 0.6 2.0 11.5 14.9 7.0 1.7 1.1 0.9 91 1
MXI -0.9 -10.7 -3.5 12.2 16.8 8.1 1.7 0.9 56 4
MOO -1.9 8.4 -2.7 18.7 13.6 11.7 1.9 0.7 60 4
XLB 6.3 2.9 -0.3 21.8 17.0 10.5 2.7 1.3 1.0 93 4
XME 17.1 0.7
-24.2 -0.8 19.1 6.4 1.0 0.5 57 3
VAW 4.3 0.2 3.6 17.2 18.9 10.3 2.5 1.1 1.0 78 2

Real Est
SCHH 3.5 -3.9 6.6 7.5 45.3 2.3 6.5 53 5 9,906 86 46.7 7
RWR 3.5 -3.9 6.6 7.5 45.3 2.3 6.5 54 5 9,897 85 47.9 7 -49.0 16.2 0.9
VNQ 2.7 -3.6 10.6 7.9 42.7 2.4 6.4 50 8 8,430 124 42.5 9 -47.3 16.0 1.0
Tech
IYW 18.2 11.4 12.2 23.4 15.4 10.2 3.2 2.3 1.0 93 7
IXN 16.2 7.7 10.8 23.0 15.3 9.6 2.8 1.8 1.0 80 7
XLK 13.6 9.6 11.2 23.3 16.8 8.9 3.2 2.3 1.0 99 7
VGT 15.7 10.1 11.9 24.4 16.2 10.2 3.2 2.2 1.0 89 7

79,147 133 66.4

79,697 118 53.4
98,279 77 62.0
54,860 416 55.1

5 -40.2
7 -36.8
5 -38.3
6 -36.7

17.1 0.8
16.4 0.8
14.6 1.0
16.8 0.9

Utilities
IDU -5.4 -3.9 0.4
JXI -15.4 -3.6 -12.0
XLU -6.9 -3.9 -0.1
VPU -5.4 -3.8 0.9

15,030
20,064
19,543
14,028

5 -22.8
8 -27.1
4 -22.8
5 -22.0

9.9 1.4
11.7 0.4
10.4 1.3
9.9 1.4

Data through July 31, 2013.

8.2 19.6 6.9 1.7 1.6 1.0 91 1

7.8 16.5 5.5 1.3 0.8 1.0 70 1
7.6 19.5 6.6 1.7 1.5 1.0 97 1
8.1 19.1 6.6 1.7 1.5 1.0 89 1

65 46.8
78 37.0
32 57.3
79 47.0

24

Historical Performance

Nuts and Bolts

ETF Watchlist Fixed Income

NAV Return % Trailing
NAV Rtn % Ann. Tax
Current
Total
Daily
Expense Est.
SEC
12Mo
Star
Cost Market Assets Vol.
Ratio
Holding Yield Yield Inception
Rating
YTD
1Mo 3Mo 1Yr
3Yr
Ratio % Price $
($Mil)
(Thou) %
Costs
%
%
Date

Domestic
FlexShares iBoxx 3Yr Target Dur TIPS ETF TDTT
FlexShares iBoxx 5Yr Target Dur TIPS ETF TDTF
iShares Barclays 1-3 Year Credit Bond CSJ
iShares Barclays 20+ Year Treas Bond TLT
iShares Barclays 3-7 Year Treasury Bond IEI
iShares Barclays 7-10 Year Treasury IEF
iShares Barclays Credit Bond CFT
iShares Barclays Interm Govt/Credit Bond GVI
iShares Barclays Intermediate Credit Bd CIU
iShares Barclays MBS Bond MBB
iShares Barclays Short Treasury Bond SHV
iShares Barclays TIPS Bond TIP
iShares Core Long-Term US Bond ETF ILTB
iShares Core Short-Term US Bond ETF ISTB
iShares Core Total US Bond Market ETF AGG
iShares iBoxx $ High Yield Corporate Bd HYG
iShares iBoxx $ Invest Grade Corp Bond LQD
iShares S&P National AMT-Free Muni Bd MUB
iShares S&P U.S. Preferred Stock Index PFF
i PIMCO 0-5 Year Hi Yld Corp Bond Idx ETF HYS
PIMCO 1-5 Year US TIPS Index ETF STPZ
PIMCO Enhanced Short Maturity ETF MINT
PIMCO Intermediate Municipal Bond ETF MUNI
PIMCO Short Term Municipal Bond ETF SMMU
e PIMCO Total Return ETF BOND
Schwab Intermediate-Term U.S. Trsy ETF SCHR
Schwab Short-Term U.S. Treasury ETF SCHO
Schwab U.S. Aggregate Bond ETF SCHZ
Schwab U.S. TIPS ETF SCHP
SPDR Barclays Capital Short Term Corp Bd SCPB
SPDR Barclays High Yield Bond JNK
SPDR Nuveen Barclays Capital Muni Bond TFI
SPDR Nuveen Barclays Capital S/T Muni Bd SHM
Vanguard Interm-Tm Corp Bd Idx ETF VCIT
Vanguard Interm-Tm Govt Bd Idx ETF VGIT
Vanguard Intermediate-Term Bond ETF BIV
Vanguard Long-Term Bond Index ETF BLV
Vanguard Long-Term Corp Bond Idx ETF VCLT
Vanguard Long-Term Govt Bd Idx ETF VGLT
Vanguard Mortgage-Backed Sec Idx ETF VMBS
Vanguard Short-Term Bond ETF BSV
Vanguard Short-Term Corp Bd Idx ETF VCSH
Vanguard Short-Term Govt Bd Idx ETF VGSH
Vanguard Shrt-Term Infl-Prot Sec Idx ETF VTIP
Vanguard Total Bond Market ETF BND

NR
-1.5
0.7 -1.4 -0.8


25.05 1,800
219
0.20

0.4 09-19-11
NR
-3.9
1.0 -4.1 -2.7


25.16
525
52
0.20

0.3 09-19-11
QQQ 0.4 0.4
-0.2 1.3 2.0 0.63 105.24
10,638 742 0.20 0.44 0.87 1.4
01-05-07
QQ
-10.5 -2.1 -11.8 -14.5 5.8 1.19 107.70 3,197 9,510 0.15 0.09 3.61 2.9 07-22-02
QQQ -1.7 0.2 -2.4 -1.6 2.6 0.46 120.98 4,886 854 0.15 0.08 1.22 0.6 01-05-07
QQQ -4.7 -0.4 -6.0 -5.1 4.3 0.81 102.00 4,810 1,258 0.15 0.11 2.17 1.7 07-22-02
QQQQ -3.2 0.7 -4.6 -1.5 4.7 1.39 107.94 1,133 152 0.20 0.39 3.00 3.5 01-05-07
QQ
-1.3 0.3 -2.1 -0.6 2.7 0.85 110.13 1,226 106 0.20 0.25 1.28 1.9 01-05-07
QQQ -1.4 0.6
-2.7 0.7 4.1 1.24 108.29 5,995 310 0.20 0.27 2.20 3.0
01-05-07
QQ
-2.4 -0.2 -2.9 -2.4 1.8 1.17 105.04 5,665 519 0.25 0.36 3.01 1.2 03-13-07
Q
0.0 0.0 0.0 0.0 0.1 0.02 110.25 4,619 693 0.14 0.14 0.04 0.0 01-05-07
QQQQ -6.8 0.7 -7.1 -6.0 4.7 0.97 112.87 15,383 1,335 0.20 0.14 2.12 1.4 12-04-03
QQ
-8.1 -0.1 -9.8 -9.3 6.2 1.48 56.95 43 13 0.16 4.59 4.1 12-08-09
NR
-0.2
0.3 -0.7


100.15
50
11
0.12
0.72 10-18-12
QQ
-2.4 0.1 -3.3 -2.1 3.0 1.09 107.30 14,711 1,119 0.16 0.16 2.39 2.4 09-22-03
QQ
2.3 2.0
-1.8 7.8 9.2 2.56 92.98
15,353
5,754 0.50 0.12 5.21 6.4
04-04-07
QQ
-4.0 1.0 -5.6 -1.9 5.7 1.51 114.54 19,168 2,572 0.15 0.16 3.47 3.9 07-22-02
QQQ -4.0 -1.0 -5.3 -3.2 3.2 0.00 103.95 3,270 407 0.25 0.31 2.69 2.9 09-07-07
QQ
0.6 -0.6
-3.5 4.5 6.2 1.81 38.91
10,652
3,056 0.48 0.64 6.45 5.8
03-26-07
NR
4.1
2.1 -0.1 9.2


104.65 2,829
419
0.55
3.54 4.8 06-16-11
QQ
-1.8 0.8 -1.6 -1.0 2.2 0.50 53.11 1,225 247 0.20 0.16 1.81 0.2 08-20-09
QQQQ 0.3 0.1
-0.1 0.9 1.3 0.38 101.40 3,905 443 0.35 0.57 0.9
11-16-09
QQ
-3.3 -0.3 -4.8 -2.4 2.7 0.04 51.76 192 71 0.35 1.87 2.3 11-30-09
QQ
0.0 0.1
-0.5 0.0 0.8 0.01 50.07 68 23 0.35 0.24 0.9
02-01-10
NR
-1.8
0.2 -4.0 1.5


105.38 4,258
552
0.55
2.12 2.3 02-29-12
NR
-2.3
0.0 -3.2 -2.4


52.70
198
45
0.11
1.21 0.9 08-05-10
NR
0.1
0.1 -0.1 0.2


50.53
394
142
0.11
0.24 0.3 08-05-10
NR
-2.4
0.1 -3.2 -2.2


50.81
441
79
0.08
1.57 2.0 07-14-11
NR
-6.8
0.7 -7.1 -6.0


54.24
488
111
0.12
-0.85 1.0 08-05-10
QQQ 0.5 0.4
-0.2 1.6 2.2 0.61 30.67 3,068
1,226 0.13 1.3
12-16-09
QQ
2.0 2.1
-2.0 7.7 9.3 2.79 40.28 9,653
8,655 0.40 0.78 6.5
11-28-07
QQQ -4.9 -0.9 -6.0 -3.7 3.2 0.11 22.49 1,040 488 0.23 0.40 2.8 09-11-07
QQQ -0.1 0.4 -0.8 -0.2 1.3 0.04 24.17 1,953 581 0.20 0.30 1.1 10-10-07
QQQQQ
-2.7 0.9
-4.7 0.1 6.0 1.43 83.71 3,224 393 0.12 0.13 3.45 3.3
11-19-09
QQQQQ -2.2 0.2 -3.0 -2.2 3.1 0.84 63.56 130 32 0.12 1.36 1.4 11-19-09
QQQQ -3.2 0.4 -4.8 -2.1 4.7 1.48 83.66 3,854 467 0.10 0.10 2.64 3.0 04-03-07
QQQ -7.9 -0.2 -9.8 -9.0 6.5 1.79 84.31 667 109 0.10 0.17 4.49 4.4 04-03-07
QQQ -6.2 1.0 -8.3 -5.5 7.3 1.83 83.43 777 95 0.12 5.10 4.8 11-19-09
QQQQ -9.3 -1.8 -10.9 -12.9 5.5 1.19 67.37
84 14 0.12
3.43 3.0 11-19-09
QQ
-1.8 0.1 -2.3 -1.7 2.3 0.85 51.08 434 207 0.12 0.65 0.6 11-19-09
QQQ -0.2 0.4
-0.7 0.3 1.7 0.69 80.33
12,878
1,357 0.10 0.12 0.79 1.4
04-03-07
QQQQ 0.2 0.7
-0.9 1.9 3.3 0.84 79.55 6,520 748 0.12 0.26 1.61 2.0
11-19-09
QQQ 0.1 0.2
-0.1 0.2 0.7 0.20 60.86 295 65 0.12 0.22 0.3
11-19-09
NR
-1.2
0.7 -1.3


49.46
807
158

-0.96 10-12-12
QQQ -2.3 0.2 -3.2 -2.0 3.1 1.16 81.02 16,929 1,636 0.10 0.18 1.99 2.5 04-03-07

Foreign
iShares JPMorgan USD Emerg Markets Bond EMB QQQ -8.3 1.0 -8.3 -3.2 5.5 1.68 109.26 4,169 1,276 0.60 1.02 4.83 4.6 12-17-07
Market Vectors EM Local Curr Bond ETF EMLC
QQ -7.6 0.0
-10.4
-1.8 3.4 1.64 24.45 1,162 748 0.47 0.68 5.71 4.7
07-22-10
PIMCO Global Advantage Infl-Lkd Bd ETF ILB
NR
-8.6
1.0 -10.1 -3.2


48.72
116
14
0.60
1.45 0.7 04-30-12
PowerShares Emerging Mkts Sovereign Debt PCY QQQQ
-10.1 0.9
-10.1
-4.2 5.9 1.84 27.36 1,883
1,401 0.50 1.86 5.00 4.9
10-11-07
WisdomTree Emerging Markets Local Debt ELD NR
-8.4
-0.5 -10.3 -3.4


47.57 1,611
625
0.55

4.4 08-09-10

i Income Portfolio Holding g Asset-Allocation Portfolio Holding e Both Income and Asset-Allocation Holding

25

Portfolio Style

Risk


Assets
Avg
Asset Allocation %
Credit Quality (% of Bonds)
3 Yr
Worst
3 Yr
Style
# of
in Top
Turnover
Credit
Effective Standard
3 Mo
Sharpe
Ticker
Box
Holdgs 10 %
%
Quality Duration
Cash
U.S. Bond Non-U.S. Bond Other
High
Med
Low
Not Rated
Deviation Return % Ratio

Dom
TDTT
TDTF
CSJ
TLT
IEI
IEF
CFT
GVI
CIU
MBB
SHV
TIP
ILTB
ISTB
AGG
HYG
LQD
MUB
PFF
i HYS
STPZ
MINT
MUNI
SMMU
e BOND
SCHR
SCHO
SCHZ
SCHP
SCPB
JNK
TFI
SHM
VCIT
VGIT
BIV
BLV
VCLT
VGLT
VMBS
BSV
VCSH
VGSH
VTIP
BND

0
10 100.0 55 AAA
0.0 100.0 0.0 0.0 100.0 0.0 0.0 0.0
0
12 97.2 60 AAA
0.0 100.0 0.0 0.0 100.0 0.0 0.0 0.0
2
863 6.2 8 BBB
2.0 4.0 59.3 36.7 0.0 32.8 64.2 0.7 2.4 1.1 -4.7 1.7
7
23 75.7 19 AA 16.7 0.2 99.8 0.0 0.0 99.1 0.0 0.0 0.9 15.4 -11.8 0.4
4
64 45.7 51 AAA
4.5 0.0 100.0 0.0 0.0 100.0 0.0 0.0 0.0 3.1 -2.9 0.8
7
24 87.7 47 AA 7.6 8.6 91.4 0.0 0.0 99.4 0.0 0.0 0.6 6.3 -6.0 0.7
8
2,102
2.9 10 BBB
6.5 2.4 69.5 28.0 0.1 21.9 75.1 1.1 1.9 4.5 -11.5 1.0
5
1,051
25.1 15 A 3.8 3.7 86.5 9.9 0.0 73.4 25.4 0.3 1.0 2.3 -2.8 1.1
5
2,711
2.9 7 BBB
4.3 2.1 68.9 29.0 0.1 22.6 75.2 0.7 1.6 3.2 -9.4 1.3
5 502 15.8 581 A 4.6 14.4 75.9 9.6
0.0 96.7 0.0 0.0 3.3
2.0 -2.9 0.9
3
16 95 BB
0.5 100.0
0.0 0.0 0.0
69.3 0.0 0.0
30.7 0.1 0.0 -0.4
7
38 47.0 10 AA 7.8 2.5 97.6 0.0 0.0 99.5 0.0 0.0 0.5 5.6 -11.7 0.8
8
507 22.1 50 A 13.2 0.3 85.3 14.4 0.0 47.1 50.0 1.1 1.8 9.6 -9.8 0.7
1
352 27.9 0 AA 2.7 0.5 89.7 9.8 0.0 80.5 18.9 0.0 0.6
5
1,940
14.0 110 A 5.1 8.5 81.3 10.2 0.0 75.0 21.5 0.2 3.3 2.8 -3.3 1.0
6
822 4.2 19 B 4.4 0.8 84.6 14.4 0.3 1.7 1.7 94.0
2.6 7.6 -28.8 1.2
8
1,085
3.3 5 BBB
7.6 0.1 81.0 18.9 0.0 13.0 85.2 0.4 1.4 5.7 -13.1 1.0
5
2,294
2.8 9 A 6.9 5.1 94.9 0.0 0.0 59.2 32.9 0.0 8.0 4.8 -5.3 0.7
0
322
17.1
32


0.2
0.6 0.2 87.3


7.2
-29.2
0.9
0
341
11.4
33
2.1 11.1
69.1 19.0 0.8


0
14 87.6 31 2.2 0.5 99.5 0.0 0.0 2.5 -2.9 0.9
0
674
23.3
229

1.0 23.0
49.1 22.5 5.4

0.6 -0.6
2.0
0 157 16.1 11 5.7 15.9 84.1 0.0
0.0

3.8 -4.8 0.7
0 73 33.7 17 1.7 25.3 74.7 0.0
0.0

0.7 -0.6 1.1
0
730
61.9
322

5.0 -15.0
68.2 40.4 6.4


4
58 35.3 47 AA 5.1 0.0 99.9 0.0 0.1 99.6 0.0 0.0 0.4
1
42 46.7 101 AA 1.9 0.3 99.7 0.0 0.0 98.1 0.0 0.0 1.9
4
1,032
10.1 151 AA 5.1 5.7 84.4 9.9 0.0 80.0 19.4 0.2 0.4
7
35 46.4 22 AAA
7.7 0.0 100.0 0.0 0.0 100.0 0.0 0.0 0.0
0
829 5.4 50 0.9 76.2 22.7 0.2 1.2 -0.5 1.7
0
637 5.3 38 0.4 82.3 17.3 0.0 8.2 -32.5 1.1
0
459 12.6 17 0.2 97.2 2.6 0.0 5.2 -6.0 0.6
0
502 10.2 23 3.0 97.0 0.0 0.0 1.4 -1.0 0.9
8
1,351
4.4 69 A 6.5 0.8 84.1 15.0 0.0 7.9 92.1 0.0 0.0 5.0 -4.7 1.2
4
162 25.1 51 AAA
5.1 1.3 98.8 0.0 0.0 100.0 0.0 0.0 0.0 3.7 -3.0 0.8
8
1,473
26.0 65 A 6.5 0.3 87.6 12.0 0.0 58.1 41.9 0.0 0.0 4.6 -6.8 1.0
8
1,484
20.4 41 A 14.7 0.3 87.5 12.2 0.0 49.3 50.7 0.0 0.0 9.9 -9.9 0.7
8
1,204
5.7 71 A 13.9 0.6 85.2 14.1 0.1 8.8 91.2 0.0 0.0 9.2 -8.3 0.8
7
64 42.6 46 AAA
16.4 0.5 99.5 0.0 0.0 100.0 0.0 0.0 0.0 13.1 -10.9 0.5
4
1,373
16.1 529 AAA
4.0 29.1
46.1 24.7 0.1 100.0 0.0 0.0
0.0 1.9 -2.3 1.1
1
1,596
15.2 51 AA 2.7 2.9 87.2 9.8 0.0 80.1 20.0 0.0 0.0 1.3 -1.2 1.2
2
1,410
5.7 65 A 2.9 2.4 78.2 19.2 0.2 13.5 86.5 0.0 0.0 2.2 -1.2 1.4
1
104 28.1 72 AAA
1.9 0.8 99.2 0.0 0.0 100.0 0.0 0.0 0.0 0.5 -0.2 1.2
1 16 72.0 AAA 2.4 18.7 81.3 0.0
0.0 100.0 0.0 0.0 0.0

4
15,783
11.2 80 AA 5.3 6.6 81.7 11.6 0.1 76.9 23.2 0.0 0.0 2.9 -3.2 1.0

Foreign
EMB
EMLC
ILB
PCY
ELD

9
199 16.0 30 BB 7.2 0.4 0.3 92.5 6.8 5.1
6
213 17.7 16 BB 4.9 7.1 2.0 90.9 0.0 6.0
0
79
46.5
381

6.4 8.2
27.2 66.1 -1.5

0
69 18.5 4 BB 0.4 0.0 99.6 0.0 4.9
5
117 19.5 43 BBB
4.4 6.9 2.5 90.4 0.2 26.9

Data through July 31, 2013.

56.4 19.5
19.0
66.0 11.8
16.2


56.7 38.4
0.0
63.1 10.0
0.0

8.1 -20.9 0.7

12.7 -10.4 0.3

8.9 -24.5 0.7

26

Historical Performance

Nuts and Bolts

ETF Watchlist International

NAV Return % Trailing
NAV Rtn % Ann. Tax
Current
Total
Daily
Expense Est.
Star Cost
Yield
Market
Assets
Vol.
Ratio
Holding
Inception
Rating
YTD
1Mo 3Mo
1Yr
3Yr
Ratio % %
Price $
($Mil)
(Thou)
%
Costs
Date

Foreign Large Cap

iShares Core MSCI EAFE ETF IEFA
iShares Core MSCI Total Intl Stk ETF IXUS
iShares Dow Jones Intl Select Div Idx IDV
iShares MSCI ACWI ex US Index ACWX
iShares MSCI EAFE EFA
iShares MSCI EAFE Growth EFG
i iShares MSCI EAFE Minimum Volatility EFAV
iShares MSCI EAFE Value EFV
PowerShares FTSE RAFI Dev Mkts ex-US PXF
PowerShares Intl Dividend Achievers PID
PowerShares S&P Intl Dev Low Volatility IDLV
Schwab International Equity ETF SCHF
SPDR MSCI ACWI (ex-US) CWI
SPDR S&P International Dividend DWX
SPDR S&P World ex-US GWL
Vanguard FTSE All-World ex-US ETF VEU
g Vanguard FTSE Developed Markets ETF VEA
Vanguard Total Intl Stock Idx ETF VXUS
WisdomTree DEFA DWM
WisdomTree DEFA Equity Income DTH
WisdomTree International Div ex-Finncls DOO
WisdomTree International LargeCap Div DOL

NR
10.1
5.4 -0.8



NR
4.6
4.5 -2.3



QQQQ 5.8 6.6
-3.7 16.8
10.1 1.20
QQ
4.2 4.3
-2.5 16.7 6.0 0.65
QQQ 9.6 5.3
-0.9 23.4 8.5 0.73
QQQ 10.3 4.6
-0.8 21.7 9.3 0.53
NR
9.9
2.9 -4.3
15.4


QQQ 8.6 5.8
-1.1 24.4 7.4 0.89
QQQ 8.6 6.2 0.9 25.9 6.1 0.99
QQQQ 7.2 2.7
-1.9 17.2 9.7 1.15
NR
8.1
4.5 -5.2
12.8


QQQ 7.7 5.2
-1.1 21.2 8.0 0.89
QQQ 4.2 4.5
-2.6 16.1 6.1 1.03
Q
-0.8 2.4
-7.2 11.4 2.6 2.23
QQQQ 7.3 5.1
-1.3 20.1 8.0 0.94
QQQ 3.7 4.5
-2.3 18.0 6.5 0.74
QQQ 9.0 5.3
-0.8 24.5 8.6 0.60
NR
4.2
4.6 -2.3
18.3


QQQ 8.3 5.7
-1.4 21.3 8.4 1.42
QQQ 8.6 6.1
-2.0 20.9 8.1 1.65
QQ
5.6 5.8
-1.6 15.7 6.2 1.60
QQQ 7.6 5.8
-1.7 19.3 8.0 1.41

54.33
882
141


10-18-12

52.31
109
46


10-18-12
5.2 33.91 2,174 430 0.50 0.30 06-11-07
2.6 42.56 1,605 439 0.34 0.19 03-26-08
2.9 60.35
42,059
17,936 0.34 0.06 08-14-01
2.1 64.55 1,522 71 0.40 0.67 08-01-05
2.2
58.80
738
115
0.20

10-18-11
3.3 51.23 2,020 214 0.40 0.84 08-01-05
1.9 39.23 565 79 0.75 0.95 06-25-07
2.2 16.80 923 208 0.56 09-15-05
2.6
30.08
104
55
0.25

01-13-12
2.5 28.83 1,399 345 0.13 0.00 11-03-09
3.0 32.59 449 87 0.34 1.16 01-10-07
6.7 44.87 1,289 285 0.45 1.79 02-12-08
2.6 26.46 601 141 0.34 04-20-07
4.5 46.30 9,548 995 0.15 0.43 03-02-07
4.7 37.45
14,469
3,081 0.10 0.62 07-20-07
4.4
47.79 1,739
263
0.16
0.38
01-26-11
3.6 48.77 469 31 0.48 0.07 06-16-06
4.1 42.33 229 21 0.58 06-16-06
3.9 42.36 342 40 0.58 0.11 06-16-06
3.4 46.75 228 26 0.48 0.26 06-16-06

Foreign Small and Mid-Cap

iShares MSCI EAFE Small-Cap SCZ
PowerShares FTSE RAFI Dv Mkts ex-US S/M PDN
Schwab International Small-Cap Eq ETF SCHC
SPDR S&P International Small Cap GWX
Vanguard FTSE All-Wld ex-US SmCp Idx ETF VSS
WisdomTree International MidCap Dividend DIM
WisdomTree International SmallCap Div DLS

QQQ 12.4 6.2

-0.3 28.2
11.5 0.88
QQQQ 7.4 5.2
-1.3 21.1 8.5 0.81
QQ
8.0 7.0 0.2 22.7 9.2 1.03
QQ
8.5 5.2
-2.1 21.8 8.6 0.88
QQ
5.4 5.4
-1.7 20.5 7.6 0.83
QQQ 8.8 5.2
-1.1 25.3 8.6 1.34
QQQ 11.0 5.2
-2.0 29.9
11.9 1.49

3.0 44.88 2,180 340 0.40 0.21 12-10-07

1.9 25.30 72 9 0.75 09-27-07
2.8 29.03 273 36 0.35 01-14-10
2.3 30.53 754 68 0.59 0.60 04-20-07
3.8 93.85 1,438 62 0.25 0.17 04-02-09
3.6 53.15 121 8 0.58 06-16-06
4.6 55.23 594 45 0.58 0.24 06-16-06

Diversified Emerging Markets

iShares Core MSCI Emerging Markets ETF IEMG
iShares Emerging Markets Dividend DVYE
iShares MSCI Emerging Markets EEM
e iShares MSCI Emerging Mrkts Min Vol EEMV
PowerShares FTSE RAFI Emerging Markets PXH
PowerShares S&P Emerging Mrkts Low Vol EELV
Schwab Emerging Markets Equity ETF SCHE
SPDR S&P Emerging Markets Dividend EDIV
SPDR S&P Emerging Markets Small Cap EWX
Vanguard FTSE Emerging Markets ETF VWO
e WisdomTree Emerging Mrkts Equity Inc DEM
g WisdomTree Emerging Mkts SmCp Div DGS

NR
-8.1
1.0 -8.1



NR
-11.9
-0.1 -8.9
-0.1


QQQ -9.0 1.1
-7.9 1.3 0.3 0.48
NR
-2.4
-0.1 -6.4
6.1


QQQ -13.2 1.6
-10.0 -2.6
-2.6 0.75
NR
-4.0
0.0 -6.5
3.2


QQQ -8.8 0.8
-8.6 2.0 0.3 0.64
NR
-14.4
-0.8 -12.2
-5.0


QQQQ -2.4 0.6
-7.3 10.7 0.5 1.16
QQQ -9.9 1.0
-8.7 1.9 0.6 0.64
QQQQQ
-10.1 0.9
-9.3 -0.8 2.9 1.43
QQQQQ
-3.6 -0.3
-10.2 9.5 4.6 1.26

46.54 1,845
723


10-18-12
4.1
48.18
154
37
0.49

02-23-12
2.0 39.01
35,631
77,842 0.68 0.75 04-07-03
1.8
57.43 2,496
623
0.25

10-18-11
2.4 19.44 339 91 0.85 0.90 09-27-07
1.6
27.19
168
84
0.29

01-13-12
2.4 23.69 819 300 0.25 0.17 01-14-10
6.9
38.75
489
164
0.61

02-23-11
2.4 44.65 780 113 0.66 1.09 05-12-08
3.9 39.06
50,030
26,722 0.18 0.59 03-04-05
4.2 49.25 4,789 959 0.63 1.57 07-13-07
3.9 46.12 1,581 296 0.63 1.05 10-30-07

Country/Region Specific
iShares Europe ETF IEV
iShares MSCI All Country Asia ex Jpn Idx AAXJ
iShares MSCI Australia Index EWA
iShares MSCI Austria Capped EWO
iShares MSCI Brazil Capped EWZ
iShares MSCI Canada Index EWC
iShares MSCI Chile Capped ECH
iShares MSCI China Index MCHI
iShares MSCI EMU Index EZU
iShares MSCI France Index EWQ
iShares MSCI Germany Index EWG
iShares MSCI Hong Kong Index EWH

QQQ 9.8 7.4 2.4 26.1 8.7 0.73

QQ
-4.5 1.8
-5.4 7.3 2.1 0.52
NR
-3.7
2.8 -15.6
5.6 7.8
1.22
NR
-0.6
7.0 -1.6
25.5 1.2
0.62
Q
-19.6 -1.6 -19.9 -14.7 -11.8 1.22
NR
-1.4
5.7 -0.7
7.2 3.4
0.51
NR
-20.6
-9.4 -21.0
-19.0 -6.6
0.52
NR
-7.7
4.0 -4.2
7.3


Q
10.1 8.6 4.6 32.7 5.9 0.74
NR
12.8
9.1
5.9
33.7 7.5
0.70
NR
9.6
6.4
5.3
31.9 11.0
0.52
QQQQ 2.5 4.1
-3.4 17.5 9.6 1.06

2.7 41.77 1,339 393 0.60 1.01 07-25-00

1.9 55.89 2,362 553 0.69 0.99 08-13-08
6.2
23.26 1,916 2,081
0.53
0.41
03-12-96
1.9
17.48
66
57
0.52

03-12-96
3.1 43.50 5,516 18,301 0.61
07-10-00
2.5
27.63 3,495 2,185
0.53
0.19
03-12-96
1.5
48.63
409
257
0.61

11-12-07
2.4
42.56
862
649
0.61

03-29-11
2.6 35.32 2,656
2,280 0.53 0.97 07-25-00
2.7
25.46
478 1,200
0.53
1.07
03-12-96
1.7
26.32 4,513 3,218
0.53
0.94
03-12-96
2.9 19.14 2,257
3,538 0.53 0.51 03-12-96

i Income Portfolio Holding g Asset-Allocation Portfolio Holding e Both Income and Asset-Allocation Holding

Valuation



Price/
Ticker
ROE
Earn

Portfolio Style

Price/
Avg
Assets
Cash
Price/ Price/ Style
Mrkt Cap
# of
in Top Turnover
Flow
Book
Sales Box
($Mil)
Holdgs 10 %
%

27

Risk
Regional Exposure (% of Stock)
UK/W. North Latin
Asia ex-
Europe Amer Amer
Japan Japan Other

Worst
3 Mo
Return %

3 Yr
Standrd
Deviatn

3 Yr
Sharpe
Ratio

Fgn LC
IEFA 14.1 15.1 8.3 1.5 0.9 4 23,639 2,486 11.6 64 0 0 23 13 1
IXUS 14.5 14.2 7.9 1.5 0.9 4 20,475 3,370 8.2 47 6 4 17 23 4
IDV 17.5 12.2 5.4 1.6 0.6 1 12,259 113 27.9 24 70 4 0 1 25 0 -43.8
ACWX 15.0 14.0 7.8 1.5 0.9 4 30,231 1,176 9.9 9 47 6 4 16 22 4 -38.5
EFA 14.6 15.2 8.4 1.5 0.9 4 34,368 934 13.1 5 64 0 0 22 13 0 -35.2
EFG 19.6 18.6 11.5 2.3 1.3 7 32,959 533 20.6 26 64 0 0 23 13 0 -36.0
i EFAV 18.2 15.2 8.8 1.9 1.4 4 21,016 194 14.9 25 52 0 0 28 19 2
EFV 9.5 12.7 6.2 1.1 0.7 1 35,677 519 19.6 27 65 0 0 22 12 0 -34.5
PXF 8.9 13.9 6.0 1.1 0.6 1 28,186 1,027 13.0 17 62 6 0 23 9 0 -35.5
PID 20.4 15.1 8.0 2.0 1.4 4 29,234 60 31.6 46 43 40 4 2 6 5 -39.5
IDLV 0
41
SCHF 13.9 14.9 8.1 1.5 0.9 4 30,653 1,151 11.1 8 56 7 0 21 15 0 -19.7
CWI 15.2 14.0 7.7 1.5 1.0 4 33,818 617 10.4 8 48 7 4 16 22 3 -36.3
DWX 17.9 10.7 5.6 1.4 0.9 1 8,785 123 18.3 127 51 5 3 0 31 11 -44.4
GWL 13.6 14.6 8.0 1.4 0.9 4 23,018 709 10.9 8 55 8 0 21 15 0 -35.1
VEU 14.8 12.9 7.7 1.5 1.0 4 26,972 2,336 9.0 6 44 7 5 15 25 4 -37.1
g VEA 14.5 13.2 8.0 1.5 0.9 4 32,811 869 13.3 7 64 0 0 21 14 1 -34.4
VXUS 14.7 13.1 7.7 1.5 0.9 4 19,670 6,146 8.2 3 44 8 4 15 25 4
DWM 15.3 13.6 7.1 1.4 0.9 1 30,067 753 14.7 20 66 0 0 12 20 1 -34.6
DTH 14.7 12.6 6.0 1.4 0.8 1 35,514 391 22.7 31 70 0 0 4 25 1 -36.2
DOO 15.0 13.4 6.1 1.5 0.7 1 33,903 90 20.4 50 75 0 1 7 15 2 -38.5
DOL 15.8 13.6 7.1 1.5 1.0 1 60,268 228 19.8 19 70 0 0 10 20 0 -33.8

18.8 0.6
17.7 0.4
17.8 0.5
17.2 0.6

18.7 0.5
20.0 0.4
14.6 0.7

17.7 0.5
17.7 0.4
20.0 0.2
17.5 0.5
18.1 0.4
18.0 0.5

17.8 0.5
18.7 0.5
17.6 0.4
18.1 0.5

Fgn SM
SCZ 10.4 14.6 8.0 1.3 0.6 5 1,610 1,335 3.6 16 57 0 0 28 13 1 -40.6
PDN 9.5 14.5 6.6 1.1 0.6 5 1,776 1,518 2.1 28 38 9 0 34 17 1 -34.9
SCHC 11.8 14.7 8.3 1.4 0.7 5 1,658 1,298 3.9 25 58 12 0 15 15 1 -20.9
GWX 10.2 13.9 7.4 1.2 0.6 5 1,191 836 5.0 2 39 5 0 36 19 1 -39.3
VSS 12.0 14.1 7.2 1.3 0.7 5 1,357 3,199 2.7 18 39 14 4 12 29 2 -22.3
DIM 14.4 14.2 7.2 1.4 0.7 2 5,806 563 7.2 38 60 0 0 19 19 1 -35.9
DLS 13.5 12.9 6.8 1.1 0.5 3 1,039 885 5.1 56 44 0 0 25 27 3 -39.1

18.1 0.7
16.7 0.6
19.0 0.6
17.5 0.6
19.2 0.5
17.8 0.6
16.6 0.8

Div EM
IEMG 16.6 11.2 6.8 1.4 1.0 4 11,747 1,802 14.1 0 0 16 0 66 17
DVYE 22.5 10.2 6.9 1.5 0.8 1 3,317 111 22.6 41 0 0 15 0 60 25
EEM 17.3 11.1 6.9 1.5 1.1 4 18,177 841 16.1 15 0 0 18 0 64 18 -42.8 20.5 0.1
e EEMV 19.9 13.9 8.6 2.0 1.3 4 10,252 230 14.7 31 0 0 18 0 70 11
PXH 15.7 8.4 4.6 1.0 0.8 1 24,813 370 26.7 33 0 0 20 0 51 29 -40.6 20.6 0.0
EELV 15.0 13.8 8.0 1.7 1.3 4 8,302 207 9.4 50 0 0 19 0 61 20
SCHE 18.0 11.1 6.9 1.5 1.1 4
18,035 661
14.5 9 0 0
22 0
57
21
-21.9 20.0 0.1
EDIV 22.8 8.2 5.4 1.4 0.8 1 5,987 130 22.0 134 2 1 22 0 40 35
EWX 12.6 12.3 7.4 1.2 0.8 5 986 864 5.5 22 0 0 13 0 71 16 -45.7 20.9 0.1
VWO 17.7 11.9 6.6 1.6 1.2 4
19,355
1,037
12.1 8 0 0
22 0
59
18
-44.2 20.6 0.1
e DEM
20.5 8.0 4.4 1.2 0.9 1 16,971 320 31.9 47 0 0 14 0 47 39 -35.9 17.5 0.2
g DGS 16.4 11.4 6.6 1.3 0.8 2 1,248 564 44 0 0 14 0 66 20 -41.4 19.4 0.3
C/R Spc
IEV 16.9 15.1 8.4 1.6 0.9 4 48,991 360 20.9 6 100 0 0 0 0 0 -36.7 20.4 0.5
AAXJ 16.4 11.1 7.4 1.4 1.1 4 19,365 620 20.6 26 0 0 0 0 100 0 -39.0 19.4 0.2
EWA 14.0 16.3 10.3 1.9 1.9 4
30,357 72
61.7 9 0 0
0 0
100
0
-42.9 23.5 0.4
EWO 8.9 12.1 4.5 0.8 0.6 2 3,981 30 66.4 13 100 0 0 0 0 0 -58.7 26.1 0.2
EWZ 18.5 15.5 6.7 1.2 1.4 4
10,859 83
49.0 7 0 0
100 0 0
0
-53.4 26.2
-0.4
EWC 12.3 15.6 7.9 1.8 1.7 4
21,613 98
40.3 5 0
100
0 0 0
0
-40.9 16.8 0.3
ECH 10.5 17.5 1.5 1.3 1 6,455 43
59.3 48 0 0
100 0 0
0
-37.3 24.8
-0.2
MCHI
18.0 9.3 6.6 1.4 1.0 4
39,923 139
52.2 8 0 0
0 0
100
0
EZU 11.1 14.6 6.3 1.1 0.7 1 33,536 245 24.8 7 100 0 0 0 0 0 -39.8 24.7 0.4
EWQ 10.2 16.4 7.1 1.3 0.8 1 37,458 72 50.9 6 100 0 0 0 0 0 -37.3 24.6 0.4
EWG 11.4 14.1 7.7 1.4 0.7 4 43,585 56 58.8 4 100 0 0 0 0 0 -39.9 25.7 0.5
EWH 16.4 9.3 1.0 2.9 4 22,591 45 58.3 11 0 0 0 0 100 0 -38.5 20.3 0.6
Data through July 31, 2013.

28

Historical Performance

Nuts and Bolts

ETF Watchlist International

NAV Return % Trailing
NAV Rtn % Ann. Tax
Current
Total
Daily
Expense Est.
Star Cost
Yield
Market
Assets
Vol.
Ratio
Holding
Inception
Rating
YTD
1Mo 3Mo
1Yr
3Yr
Ratio % %
Price $
($Mil)
(Thou)
%
Costs
Date

iShares MSCI India INDA

iShares MSCI Indonesia EIDO
iShares MSCI Italy Capped Index EWI
iShares MSCI Japan Index EWJ
iShares MSCI Malaysia EWM
iShares MSCI Mexico Capped EWW
iShares MSCI Netherlands Invstbl Mkt Idx EWN
iShares MSCI New Zealand Capped ENZL
iShares MSCI Pacific ex-Japan EPP
iShares MSCI Philippines Invstb Mkt Idx EPHE
iShares MSCI Poland Capped EPOL
iShares MSCI Russia Capped Index ERUS
iShares MSCI Singapore Index EWS
iShares MSCI South Africa Index EZA
iShares MSCI South Korea Capped EWY
iShares MSCI Spain Capped Index EWP
iShares MSCI Sweden Index EWD
iShares MSCI Switzerland Capped Index EWL
iShares MSCI Taiwan EWT
iShares MSCI Thailand Capped Invstbl Mkt THD
iShares MSCI Turkey Invest Mkt Index TUR
iShares MSCI United Kingdom Index EWU
iShares S&P Asia 50 Index AIA
iShares S&P Latin America 40 Index ILF
Market Vectors Brazil Small-Cap ETF BRF
Market Vectors Indonesia Index ETF IDX
Market Vectors Russia ETF RSX
SPDR EURO STOXX 50 FEZ
SPDR S&P China GXC
SPDR S&P Emerging Asia Pacific GMF
SPDR S&P Emerging Europe GUR
Vanguard FTSE Europe ETF VGK
Vanguard FTSE Pacific ETF VPL
WisdomTree Europe Hedged Equity HEDJ
WisdomTree Europe SmallCap Dividend DFE
g WisdomTree Japan Hedged Equity DXJ
WisdomTree Japan SmallCap Dividend DFJ

NR
-11.0
-3.0 -12.2
3.4


NR
-1.4
-7.9 -15.5
0.5 6.1
0.33
NR
0.9
10.2
1.3
25.2 -4.4
0.67
QQQ 16.9 0.6
-3.4 25.3 7.0 0.37
NR
2.1
-2.8 -1.4
7.9 11.0
1.10
NR
-4.4
1.7 -8.1
7.2 10.4
0.28
NR
14.7
9.8
8.7
32.4 8.3
0.50
NR
5.0
4.9 -9.2
20.9


QQQ -1.7 3.2
-11.7 8.2 8.2 1.13
NR
6.9
2.4 -12.3
20.7


NR
-7.5
9.2
4.7
17.4 1.0
0.74
NR
-10.8
3.3 -3.9
-2.4


NR
-0.4
3.6 -6.4
5.0 6.9
1.46
NR
-14.0
2.4 -5.1
-5.9 2.8
0.74
NR
-10.2
4.4 -3.5
0.0 5.3
0.16
NR
7.5
12.5
1.8
40.8 -1.5
1.27
NR
14.5
11.0
2.5
24.8 12.0
0.82
NR
14.8
4.1 -0.5
30.4 14.8
0.54
QQQ 2.1 0.8
-1.6 13.9 6.2 0.93
NR
-4.0
-3.4 -17.5
11.8 18.3
0.59
NR
-12.4
-4.4 -20.8
6.5 -0.5
0.54
NR
6.5
6.5
1.0
17.1 10.2
0.70
QQQ -5.3 3.0 -4.3 5.7 6.2 0.71
QQQQ -15.6 -1.9
-15.2 -11.4
-5.4 0.66
Q
-25.5 -1.6
-22.3 -10.9
-7.9 1.59
NR
-3.5
-6.5 -15.3
-1.4 3.8
0.50
NR
-12.9
2.7 -3.6
0.3 -4.9
0.59
Q
8.8 8.8 4.6 32.7 5.0 1.43
QQ
-4.3 5.0
-1.7 10.0 0.6 0.79
QQQ -2.3 1.7
-4.5 9.8 2.9 0.96
NR
-10.1
2.6 -5.4
4.3 -1.5
1.03
QQQ 9.6 7.4 2.9 27.5 9.5 1.00
QQQ 8.1 2.2
-6.1 19.3 7.7 0.78
QQQ 10.8 6.4 2.8 23.3 8.0 0.97
QQQ 17.2 8.0 7.3 43.3
13.2 1.53
QQ 25.2 -0.4
-4.1 45.9 9.5 0.61
QQQ 12.5 1.6
-6.0 16.9 8.6 0.84

0.4
22.78
273
618
0.67

02-02-12
1.6
28.99
472
450
0.61

05-05-10
2.4
13.00
686 1,418
0.53

03-12-96
1.3 11.23
11,547
46,612 0.53 0.79 03-12-96
2.4
15.11
961 1,681
0.53
0.57
03-12-96
1.0
66.07 2,220 3,797
0.53

03-12-96
1.5
22.89
186
149
0.53

03-12-96
4.7
35.18
153
57
0.53

09-01-10
4.6 44.65 3,145
1,314 0.50 0.42 10-25-01
0.9
36.00
383
398
0.61

09-28-10
3.3
26.75
277
325
0.61

05-25-10
2.9
20.00
250
403
0.61

11-09-10
4.4
13.33 1,311 2,434
0.53
0.76
03-12-96
3.0
59.62
567
439
0.61
1.08
02-03-03
0.7
55.83 3,278 2,404
0.61

05-09-00
4.0
31.28
313
351
0.53

03-12-96
3.1
33.10
437
235
0.53
0.12
03-12-96
2.0
29.85
942
524
0.53

03-12-96
2.0 13.63 2,648
5,971 0.61 0.38 06-20-00
2.5
75.87
774
339
0.61

03-26-08
2.0
56.15
657
608
0.61
0.52
03-26-08
2.8
18.79 2,344 2,085
0.53
0.55
03-12-96
2.3 44.01 239 50 0.50 11-13-07
3.1 36.18 1,095 637 0.50 0.59 10-25-01
2.0 31.28 245 134 0.59 0.86 05-12-09
1.9
27.49
302
407
0.58
0.87
01-15-09
2.8
25.88 1,294 4,134
0.62
1.89
04-24-07
3.3 36.07 2,595 926 0.29 10-15-02
2.4 67.61 872 203 0.59 1.51 03-19-07
2.4 73.52 362 48 0.60 1.44 03-19-07
4.4
37.81
68
14
0.60

03-19-07
5.1 51.80 6,781
2,391 0.12 0.08 03-04-05
4.0 56.87 2,246 384 0.12 0.75 03-04-05
1.8 51.00 319 159 0.58 12-31-09
3.5 46.05 62 21 0.58 06-16-06
1.1 45.12
10,674
8,162 0.48 0.46 06-16-06
2.2 47.72 268 81 0.58 06-16-06

World Stock
iShares MSCI ACWI Index ACWI
iShares MSCI All Country World Mini Vol ACWV
iShares MSCI Kokusai TOK
iShares S&P Global 100 Index IOO
Vanguard Total World Stock Index ETF VT

QQQ
NR
QQQ
QQQ
QQQ

11.1 4.7 1.5 20.5

11.1 0.53
12.8
2.9 -1.9
14.6


14.0 5.7 3.4 23.3
13.5 0.59
13.3 4.8 2.5 22.1
11.1 0.64
11.2 5.0 1.8 22.1
11.5 0.50

2.1 52.29 4,050

1,282 0.34 0.52 03-26-08
2.5
61.70 1,043
82
0.23

10-18-11
2.5 47.84 562 98 0.25 12-10-07
2.5 70.87 1,316 78 0.40 0.66 12-05-00
3.2 54.17 2,459 249 0.19 0.32 06-24-08

Global Real Estate

iShares International Dev Real Estate IFGL
SPDR Dow Jones Global Real Estate RWO
SPDR Dow Jones Intl Real Estate RWX
Vanguard Global ex-US Real Estate ETF VNQI

QQQ -0.1 1.3

-11.3 13.6
10.4 1.58
QQQQ 3.6 1.0 -8.9 8.9 13.3 1.79
QQQ 0.7 1.3
-11.0 12.5
12.3 2.35
NR
-0.6
1.1 -11.6
16.2

6.0 31.84 686

1,172 0.48 11-12-07
4.5 42.56 979 226 0.50 05-07-08
6.7 40.51 3,746 479 0.59 1.40 12-15-06
5.9
54.02
816
102
0.32

11-01-10

i Income Portfolio Holding g Asset-Allocation Portfolio Holding e Both Income and Asset-Allocation Holding

Valuation

Portfolio Style

Price/
Ticker
ROE
Earn

29

Risk

Price/
Avg
Assets
Cash
Price/ Price/ Style
Mrkt Cap
# of
in Top Turnover
Flow
Book
Sales Box
($Mil)
Holdgs 10 %
%

Regional Exposure (% of Stock)

UK/W. North Latin
Asia ex-
Europe Amer Amer
Japan Japan Other

Worst
3 Mo
Return %

3 Yr
Standrd
Deviatn

3 Yr
Sharpe
Ratio

INDA 20.7 14.0 9.6 1.8 1.4 7

14,671 78
54.8 4 0 0
0 0
100
0
EIDO 25.5 15.9 2.8 2.4 7 7,889 108
58.5 8 0 0
0 0
100
0
-15.5 21.5 0.4
EWI 6.2 12.0 2.7 0.6 0.3 1 17,666 25 69.1 14 100 0 0 0 0 0 -38.4 31.3 0.0
EWJ 7.8 16.1 7.7 1.3 0.7 4 18,661 317 24.0 3 0 0 0 100 0 0 -27.4 14.9 0.5
EWM 18.4 16.3 11.1 2.0 2.5 4 10,636 44 52.6 24 0 0 0 0 100 0 -31.3 14.8 0.8
EWW 18.2 15.8 9.1 2.5 1.6 4
15,597 50
64.2 10 0 0
100 0 0
0
-41.8 21.2 0.6
EWN 16.5 12.2 6.0 0.9 0.6 4 16,428 55 71.2 10 100 0 0 0 0 0 -43.5 22.3 0.5
ENZL 16.2 15.1 10.9 1.9 1.7 8 1,845 25 67.8 12 0 1 0 0 99 0
EPP 14.7 13.8 1.6 2.0 4
25,587 151
40.9 7 0 0
0 0
100
0
-41.0 21.4 0.5
EPHE 15.5 13.4 9.0 2.3 2.8 7 5,626 43 63.6 25 0 0 0 0 100 0
EPOL 13.8 10.4 1.1 0.8 5 4,129 44
62.6 15 0 0
0 0 0
100
-34.0 31.5 0.2
ERUS
17.3 5.1 3.4 0.8 0.8 1
36,076 25
74.5 16 0 0
0 0 0
100
EWS 12.9 13.0 1.3 1.3 1
15,555 33
66.8 3 0 0
0 0
100
0
-44.1 20.2 0.4
EZA 19.5 15.7 14.0 2.3 1.6 7
11,963 51
59.1 4 0 1
0 0 0
99
-40.8 22.8 0.2
EWY 11.3 10.8 5.9 1.2 0.7 1 15,993 105 47.2 12 0 0 0 0 100 0 -45.2 23.5 0.3
EWP 13.2 15.5 4.7 1.1 0.8 1 26,951 27 70.8 17 100 0 0 0 0 0 -35.5 31.5 0.1
EWD 17.8 13.6 12.3 2.0 1.5 4 20,515 34 60.7 7 100 0 0 0 0 0 -42.9 25.8 0.6
EWL 21.7 17.9 12.1 2.1 1.7 7 59,636 41 72.2 8 100 0 0 0 0 0 -28.1 17.0 0.9
EWT 13.7 16.3 8.3 1.7 0.8 4 11,482 113 46.2 22 0 0 0 0 100 0 -41.2 19.6 0.4
THD 24.1 6.7 4.2 1.2 0.6 4 3,325 111 51.9 12 0 0 0 0 100 0 -45.3 24.2 0.8
TUR 19.8 10.0 1.4 1.1 5 5,745 99
59.2 9 0 0
0 0 0
100
-51.1 28.9 0.1
EWU 19.5 13.7 8.3 1.6 0.9 1 50,173 111 43.3 7 100 0 0 0 0 0 -35.4 17.2 0.6
AIA 15.3 10.0 6.7 1.3 1.1 1 53,136 53 47.8 11 1 0 0 0 99 0 -37.6 18.6 0.4
ILF 18.6 12.2 6.5 1.4 1.3 4
34,457 44
60.5 11 0 1
99 0 0
0
-47.7 21.3
-0.2
BRF 4.6 22.2 12.6 1.5 0.9 6 1,451 80
31.0 76 0 3
95 0 1
0
-29.1 29.0
-0.1
IDX 23.6 17.1 2.7 2.4 7 10,241 49 56.2 19 0 0 0 0 100 0 -15.3 20.9 0.3
RSX 14.9 6.7 3.8 0.9 0.7 1
22,386 49
61.3 41 4 0
0 0 0
96
-62.2 29.8 0.0
FEZ 11.7 14.6 6.8 1.2 0.8 1 65,040 54 39.0 9 100 0 0 0 0 0 -37.3 25.8 0.3
GXC 17.9 9.9 7.2 1.4 1.0 4 27,149 218 45.4 10 0 0 0 0 100 0 -42.7 22.4 0.1
GMF 17.8 12.5 8.0 1.6 1.0 4
14,657 350
20.3 7 0 0
0 0
100
0
-39.7 19.4 0.2
GUR 16.7 6.4 3.7 0.9 0.7 1
15,896 107
46.5 6 2 0
0 0 0
98
-52.5 26.6 0.1
VGK 16.8 12.1 8.0 1.5 0.9 4 41,090 506 20.2 7 100 0 0 0 0 0 -37.0 20.6 0.5
VPL 10.3 14.7 8.0 1.3 0.9 4 17,965 819 19.1 4 0 0 0 53 47 0 -29.8 15.3 0.6
HEDJ 13.1 16.1 9.4 1.5 0.8 4 35,007 124 44.5 43 100 0 0 0 0 0 -14.2 12.2 0.7
DFE 14.0 12.5 6.8 1.1 0.5 3 1,126 238 16.1 48 99 0 1 0 0 1 -46.2 22.4 0.7
g DXJ 9.3 15.3 8.3 1.2 0.7 4 16,660 315 37.5 36 0 0 0 100 0 0 -24.0 17.3 0.6
DFJ 7.1 14.6 6.9 0.9 0.4 2 808 558 5.8 41 0 0 0 100 0 0 -20.2 13.6 0.7
Wd Stk
ACWI 17.1 15.7
ACWV 20.4 15.1
TOK 18.2 16.2
IOO 18.2 14.4
VT 16.6 14.6

9.1
9.3
9.6
8.8
8.7

1.9 1.2 4 42,635 1,369 8.3 6 25 52 2 8 11 2 -34.4

2.3 1.5 4 23,417 310 13.4 22 10 58 0 14 16 1
2.1 1.3 4 48,771 1,279 10.4 5 30 64 0 0 6 0 -33.7
1.8 1.1 1
122,909 110 29.2 5 41 51 0 5 3 0 -27.8
1.8 1.1 4 26,772 4,859 7.2 16 23 51 2 8 13 2 -33.5

15.6 0.8

15.7 0.9
15.4 0.8
15.7 0.8

Gbl RE
IFGL
RWO
RWX
VNQI

1.1 4.2 4 7,395

1.5 5.3 5 8,395
1.1 4.3 4 6,984
1.1 3.1 4 5,864

19.5 0.6
16.2 0.8
18.0 0.7

9.1 11.2
8.0 19.5
8.7 12.0
9.6 12.0

Data through July 31, 2013.

205 34.9 16 26 5 0 28 40 0 -40.5

219 29.1 8 14 58 0 10 17 0 -45.5
133 39.0 11 30 9 1 22 37 1 -41.5
464 25.5 10 18 4 3 24 48 3

30

Historical Performance

Nuts and Bolts

Risk

ETF Watchlist Alternatives

NAV Return % Trailing
NAV Rtn % Ann. Total Daily
Expense Est.
Fund
Star
Assets Vol.
Ratio
Holding Inception
Legal
Rating
YTD
1Mo
3Mo 1Yr
3Yr ($Mil) (Thou) %
Costs
Date
Structure

Commodities
ELEMENTS Rogers Intl Commodity ETN RJI
ETFS Physical Silver Shares SIVR
ETFS Physical Swiss Gold Shares SGOL
i iShares Gold Trust IAU
iShares Silver Trust SLV
PowerShares DB Commodity Index Tracking DBC
SPDR Gold Shares GLD

QQQQ -4.5
NR -33.5
NR -21.2
NR -21.1
NR -33.6
QQQQ -6.5
NR -21.2

2.8
5.7
10.2
10.3
5.7
3.2
10.2

-0.8 -3.2
-18.4 -29.5
-10.6 -19.3
-10.6 -19.1
-18.5 -29.7
-1.5 -5.2
-10.6 -19.3

2.9
681 626
3.8
359 145
3.6 1,275
58
3.4 7,557 5,942
3.6 6,677 11,034
4.2 6,400 1,981
3.6 39,176 11,011

i Income Portfolio Holding g Asset-Allocation Portfolio Holding e Both Income and Asset-Allocation Holding

0.30
0.39
0.25
0.50
0.87

0.81
0.30
0.39
0.25
0.51
1.07
0.41

10-17-07
07-24-09
09-09-09
01-21-05
04-21-06
02-03-06
11-18-04

Uncoll Debt
Grantor Trst
Grantor Trst
Grantor Trst
Grantor Trst
Partnership
Grantor Trst

3 Yr
Worst 3 Yr
Standrd 3 Mo
Sharpe
Deviation Return % Ratio

17.2
45.1
21.7
22.5
45.2
17.6
21.6

-42.3
-34.2
-25.5
-25.5
-47.0
-39.2
-25.5

0.3
0.3
0.3
0.3
0.3
0.3
0.3

Data through July 31, 2013.

Morningstar ETFInvestor

Still Risky
Exchange-Traded Notes | Samuel Lee

I removed the Quantitative Strategy section. I apologize for the inconvenience. The strategies lacked
proper context when published alone in the newsletter, because space constraints allowed us to publish
only one strategy per month. Even then, the strategies
were a couple of weeks stale by the time they got to
your mailbox. They were interesting only to the
minority who already followed the strategies online,
and even then, not all that useful on account of
their staleness.
The strategies will continue to be published every
month online at etf.morningstar.com.
In a study published in the summer 2013 edition of
The Journal of Fixed Income, three academics argue
that exchange-traded note credit risk is often mispriced by investors. ETNs are senior, unsecured debt
instruments issued by banksbonds, really. And
should an issuer file for bankruptcy, its ETN investors
end up standing in line with all the other unsecured
creditors, left to scavenge whatever assets are left
over after more senior creditors lay their claims. The
poor saps who held Lehman Brothers Opta ETNs,
for instance, recovered only 9% of their investments.
Unlike a normal bond, though, an ETN can be redeemed on a daily basis for fair value. That doesnt
mean ETNs are riskless: Issuers can take about a
week to meet redemptions with cold, hard cash, during which the redeemer is still exposed to credit
risk should the issuer suddenly go bankrupt.
The academics calculated ETN fair values using the
default probabilities they extracted from the credit
default swaps, or CDS, of the issuing banks. A CDS
contract transfers the credit risk of a bond, effectively acting as tradable insurance policies. Because
theyre so actively traded, CDS prices are widely

August 2013

31

considered the best source of information on the

markets estimates of an issuers creditworthiness.
The trio found that in normal times the credit risk of
an ETN was de minimis, warranting a discount of
a basis point (a hundredth of a percentage point) or
lesseffectively riskless. I admit I was surprised.
Because ETNs are complicated and opaque, designed
by a much more sophisticated counterparty, I was
perhaps too harsh on them. However, during times of
extreme stress, the estimated rational discounts
for some issuers ETNs went over 50 basis points, but
such depths were plumbed only during the financial crisis.
The authors argue that their study demonstrates investors dont fully appreciate the credit risks ETNs
pose. I dont think they made their case. Their data
suggest that in all but the most extreme situations,
ETNs pose very little credit risk as long as the investor
monitors the health of the issuing bank. After all,
bankruptcies dont happen without some signs of
stress. Anyone not comatose knew Lehman Brothers
could declare bankruptcy during the financial crisis.
Im not taking this one study as gospel. Its possible
that ETNs pose a lot of credit risk, for reasons the
authors missed. However, the evidence suggests that
my intuition on ETN credit risk was too pessimistic.
I suspect the typical investor has an exaggerated fear
of ETN credit risk.
But even if I believed ETNs had zero credit risk,
I wouldnt buy them. Theyre expensive, complicated,
opaque financial contracts that pit you against
some of the most sophisticated, ruthless financial
institutions in the world. Ive spent hours reading
ETN prospectuses, and Ive found that banks often
have no problem burying fees and unfavorable
clauses in the fine print. I know just enough to know
that Ill never truly understand them.

Morningstar ETFInvestor
22 W. Washington Street
Chicago, Illinois 60602

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