ETF Basics: An Introduction

ETF Basics: An Introduction
Call 1-800-iShares to request a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal. The iShares Funds (Funds) are distributed by SEI Investments
Distribution Co. (SEI). 2009 BlackRock Institutional Trust Company, N.A. All rights reserved. iShares is a registered trademark of BlackRock Institutional Trust Company, N.A. iS-0205-0209
INTRODUCTION
What has made iShares ETFs one of the fastest growing investment vehicles? Why have they posted 10 years of rising growth, in both bull and bear markets? How do they work? And how can you make them work for you? Well, youre about to find out.
UNIQUE HYBRID STRUCTURE

Its the unique hybrid structure of Exchange Traded Funds that make them so innovative. See, they trade on an exchange like a stock but are structured like a traditional mutual fund. Just like a stock, ETFs trade on an exchange throughout the day. So you can apply stock trading strategies to ETFslike placing a limit order, short selling, and (on some iShares ETFs) trading options. But at the same time, ETFs also offer many of the benefits of an index mutual fundincluding benchmark tracking, low expense ratios, and low turnover. Buying and selling shares of iShares Funds will result in brokerage commissions. With short sales, you risk paying more for a security than you received from its sale.
CREATION AND REDEMPTION

ETFs feature a unique process for creating and redeeming shares. And this makes a whole host of benefits possible. Heres how it works. The creation and redemption of ETF shares occurs between the fund and institutional broker dealers or market makers called Authorized Participants. These Authorized Participants gather underlying securities that replicate the funds exact holdings and weights and then deliver them to the fund with a small amount of cash. The fund, in turn, provides ETF shares back to the authorized participants, who then release those ETF shares into the marketplace. This process works in reverse for redemptions, and its known as an in-kind transfer. Its a tax-free exchange. And ETF fund managers dont have to sell shares of the fund to raise cash in order to meet redemptions a key part of why ETFs are so tax-efficient. Transactions in shares of the iShares Funds will generate tax consequences.
LIQUIDITY
Many investors think that you can determine the liquidity of iShares ETFs by simply observing their trading volume. But a thinly traded iShares Fund is not necessarily a fund with low liquidity. In fact, iShares ETFs are as liquid as their underlying stocks or bonds. Why? Because when demand increases on the secondary market for an iShares Fund with low trading volume, Authorized Participants use the creation and redemption process to simply create additional shares and inject them into the market. That means that the liquidity of iShares ETFs is essentially unlimited.
FPO
LOW EXPENSE RATIOS

One of the benefits that often attract investors to ETFs is their generally lower cost compared to traditional mutual funds. ETFs typically carry expense ratios that are well below those of both active and index mutual funds. For example, most iShares funds carry expense ratios from 9 to 75 basis points. Thats substantially lower than the average active mutual fund which typically can carry expense ratios of over 100 basis points. And while ETF transactions will most likely generate brokerage commissions, their lower expenses can offset those transaction costs for long-term investors.
iShares ETFs and mutual funds each hold baskets of securities. iShares ETFs trade on exchanges intraday at market price, which may be greater or less than net asset value. Shares of iShares ETFs are not individually redeemed from the fund. Transactions in shares of iShares ETFs result in brokerage commissions and generate tax consequences. iShares ETFs seek to track a market index, before fees and expenses. Mutual funds are accessed directly from the fund company or through a select broker, pricing generally occurs once a day, and investors buy or redeem shares at the end-of-day net asset value, less any applicable fees. Some mutual funds may charge sales loads or redemption fees. Active mutual funds seek to outperform their benchmark while the goal of index mutual funds is to track their index. Consequently, active funds typically charge more than index-linked products for the increased trading and research expenses that may be incurred. Mutual funds and iShares ETFs are obliged to distribute portfolio gains to shareholders.
TAX EFFICIENCY
There are two reasons why iShares ETFs are tax efficient. First, because all iShares ETFs are designed to track market indices, they normally experience less turnover than actively managed funds. This decreases the likelihood of taxes being incurred. Second, the unique hybrid nature of iShares ETFs protects shareholders from the actions of other shareholders. Buyers and sellers interact directly with one another on an exchange, not with the fund itself. This gives investors greater control when it comes to managing their exposure to capital gainstheyre taxed based on their own actions, not the actions of other shareholders. Mutual funds and iShares Funds are obliged to distribute portfolio grains to shareholders. Certain traditional mutual funds can be tax efficient as well.
TRANSPARENCY
Because iShares ETFs are highly transparent, investors always know exactly what they own. Thats because holdings are published online and refreshed every 15 seconds. Most mutual funds only disclose the securities theyre holding once every three months. In addition, ETF fund pricing is available throughout the trading day. And the costs associated with buying, selling, and owning iShares ETFs are explicit. And that includes commissions, bid/ask spreads and impact costs. iShares ETFs have nothing to hide. Which can give you the clarity you need to help keep your investment strategies on target. Due to MSCI license restrictions, holding for MSCI benchmarked funds are updated monthly.
TARGETED ASSET CLASS EXPOSURE

iShares ETFs track well-established benchmarks designed to represent specific segments of the market. So one thing investors never need to worry about is style drift. If you want, say, an allocation to small cap value and only small cap value, you can be sure that the appropriate iShares fund will closely track its corresponding small cap benchmark. And because index providers publish their construction methodologies, investors can always make informed choices about the indexes they want to track.
MODULAR INVESTING
iShares ETFs are highly modular with over 150 different funds to choose from, and even more on the way. This large, extended family of funds gives you the opportunity to build your portfolio around as many asset classes as you need: Domestic or international, value or growth, large-cap or small, whole sectors or specific industries. Even funds that specialize in fixedincome markets and alternatives.
INVESTMENT STRATEGIES
The flexibility and breadth of the iShares family allows investors to utilize ETFs within a variety of common investment strategies. Short-term strategies such as cash equitization, where investors put idle cash to work in times of transition. Tactical strategies such as sector rotation, where investors express their views by overweighting or underweighting sectors based on research. Or strategic applications of ETFs, such as the core/satellite strategy, which blends core index-based holdings with "satellite" allocations to actively managed securities or products. The information provided is not intended to be a complete analysis of every material fact respecting any strategy and has been presented for educational purposes only. There is no guarantee that any strategies discussed will be effective.
ETF Basics: An Introduction CONCLUSION

The information provided is not intended to be a complete analysis of every material fact respecting any strategy and has been presented for educational purposes only. There is no guarantee that any strategies discussed will be effective. Investment comparisons are for illustrative purposes only and not meant to be all-inclusive. To better understand the similarities and differences between investments, including investment objectives, risks, fees, and expenses, it is important to read the products' prospectuses. Shares of the iShares Funds may be sold throughout the day on the exchange through any brokerage account. However, shares may only be redeemed directly from a Fund by Authorized Participants, in very large creation/redemption units. Transactions in shares of the iShares Funds will result in brokerage commissions and will generate tax consequences. Mutual funds and iShares Funds are obliged to distribute portfolio gains to shareholders. The iShares Funds (Funds) are distributed by SEI Investments Distribution Co. (SEI). SEI does not provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor. The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Cohen & Steers Capital Management, Inc., Dow Jones & Company, Inc., European Public Real Estate Association ("EPRA"), FTSE International Limited ("FTSE"), FTSE/Xinhua Index Limited ("FXI"), iBoxx, J.P. Morgan Securities Inc., MSCI Inc., Morningstar Inc., The NASDAQ OMX Group, Inc., National Association of Real Estate Investment Trusts ("NAREIT"), New York Stock Exchange, Inc., Frank Russell Company, or Standard & Poor's, nor are they sponsored, endorsed, or issued by Barclays Capital. None of these companies make any representation regarding the advisability of investing in the Funds. Neither SEI, nor any of its affiliates, are affiliated with the companies listed above. FXI does not make any warranty regarding the FTSE/Xinhua Index. All rights in the FTSE/Xinhua Index vest in FXI. Neither FTSE nor NAREIT makes any warranty regarding the FTSE NAREIT Real Estate 50/Residential/ Retail/Mortgage REITs or Industrial/Office Index; all rights vest in NAREIT. Neither FTSE nor NAREIT makes any warranty regarding the FTSE EPRA/NAREIT Global Real Estate ex-US/North America/Europe/Asia Index; all rights vest in FTSE, NAREIT, and EPRA. All rights in the FTSE Developed Small Cap ex-North America Index vest in FTSE. "FTSE" is a trade- and servicemark of London Stock Exchange and The Financial Times Limited; "Xinhua" is a trade- and servicemark of Xinhua Financial Network Limited.

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