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The Facts and Fallacies of ETF Investing

The Facts and Fallacies of ETF Investing. Stan Ueland ETF Portfolio Manager. ETFs - State of the State. ETPs @ 2010* > 1,000 U.S. Listed > $ 1 Trillion Assets 40% Assets in 10 ETPs 50% ETFs have < $100m Beta vs. Alpha . ETF Structure vs. Mutual Funds vs. CEFs vs. Stocks

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The Facts and Fallacies of ETF Investing

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  1. The Facts and Fallacies of ETF Investing Stan Ueland ETF Portfolio Manager

  2. ETFs - State of the State • ETPs @ 2010* • > 1,000 U.S. Listed • > $ 1 Trillion Assets • 40% Assets in 10 ETPs • 50% ETFs have < $100m • Beta vs. Alpha • ETF Structure • vs. Mutual Funds • vs. CEFs • vs. Stocks • Unique to ETFs • INAV • Basket • Creation/Redemption Process * Includes ETFs, ETNs as of 12/31/2010

  3. Example of ETF Pricing This example is for illustrative purposes and does not represent any actual investment or fund. Source: First Trust Advisors, 8/6/09.

  4. Example of ETF Pricing 00 This example is for illustrative purposes only. Fund: FTA – First Trust Large Cap Value AlphaDEX Fund. Source: Bloomberg. The intraday NAV for an ETF is typically calculated and published by a third party under a separate symbol every 15 seconds throughout the trading day over the Consolidated Tape based on the current value of the securities specified for creation and redemption plus any estimated cash amounts associated with the creation unit, all on a per-ETF share basis. The intraday NAV is designed to give investors a sense of the relationship between a basket of securities that are representative of those held in the ETF’s portfolio and the share price of the ETF on an intraday basis.

  5. ETF Liquidity Buy $10m in FNX (First Trust Mid Cap Core AlphaDEX Fund) Trader’s perspective: “Stock trades $467k per day” $10m / $467k = 2,140% of ADV Liquidity of underlying: Shares trade $7.5b per day $10m / $7.5b = 0.13% of ADV This example is for illustrative purposes only. ADV statistics as of 1/7/2010. Liquidity of the underlying holdings is a significant factor in the liquidity of an ETF.

  6. ETF Structure Provides Liquidity Investor Advisor Market Maker AP ETF ETF ETF Sponsor

  7. ETF Structure – Creation Market Maker AP ETF ETF Sponsor • This example is for illustrative purposes and does not represent any actual investment or fund.

  8. ETF Liquidity Examined • 8,300 = Average Daily Volume • 145,000 = Total Volume for the Day • 92,800 = Size of a Single Trade • $4.6m (28%) = Growth in the Fund for the Day FTA – First Trust Large Cap Value AlphaDEX Fund. (7/1/08) This example uses actual data for illustrative purposes only.

  9. ETF Liquidity – Cases in Point • 1.8M share trade (17k = 30 day ADV) • Microcaps– Smallest/Compelling • 3.8M shares trade (21k = 30 day ADV) • $114M – growth in a single day • 16.3M shares trade (257k = 30 day ADV) • 250k shares at the bid • 4.5M shares trade (85k = 30 day ADV) • Buying commodity exposure via equities FDM – 5/7/10; BICK – 10/4/10; FXO & CU – 3/23/11

  10. ETF Structure – Redemption Market Maker AP ETF ETF Sponsor • This example is for illustrative purposes and does not represent any actual investment or fund.

  11. ETF Structure Compared to Mutual Fund Structure Traditional Mutual Fund Example

  12. ETF Structure – Redemption Revisited Investor Advisor Market Maker AP ETF ETF ETF Sponsor

  13. ETF Liquidity – Case in Point (FXG & FXD) Despite a meaningful selloff, both small and large ETFs trade up tight to their Indicative Value. Graphs reflect Central time. Source: Bloomberg – 5/21/10. This example uses actual data for illustrative purposes only.

  14. Thoughts on Trading ETFs • Tips • Open/Close • Limits • iNAV • INTL funds • Stops  Stop Limits Alerts • Implementation • Engage Us • Assistance • Access • Trading Desks • ‘It’s an ETF’ Example of Daily Fund Pricing You should consider the fund’s investment objectives, risks and charges and expenses carefully before investing. Contact First Trust Portfolios L.P. at 1-800-621-1675 or visit www.ftportfolios.com to obtain a prospectus or summary prospectus which contains this and other information about the fund. The prospectus or summary prospectus should be read carefully before investing. This example is for illustrative purposes and does not represent any actual investment or fund. Graph reflects Central time. Blue line = iNav, Red line = Best Bid, Green line = Best Offer

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