1. Champion Capital Research, Inc.1 Exchange Traded Funds - Structures and Strategies Mary Kathryn Campion, Ph.D., CFA, AIFA Champion Capital Research, Inc. March 2007

2. Champion Capital Research, Inc. 2 Overview  What are ETF’s?  Benefits and Applications  Practical Portfolio Strategies  Questions and Answers

3. Champion Capital Research, Inc.3 What are ETF’s?

4. Champion Capital Research, Inc. 4 What are ETF’s?: The Basics  Exchange Traded Funds (ETFs) are open ended mutual funds.*  ETFs represent a fractional ownership in the underlying securities in a particular index.  ETFs can be traded like stock on the major stock exchanges.  Unlike closed-end funds, the number of ETF shares can change daily.  Intraday portfolio values are calculated every fifteen seconds.  ETFs range in style, sector, country ranging from value, growth, international equity, commodity, and domestic to equity and fixed income.  More and more specialty index funds created annually.  Other structures include exchange traded unit investment trusts and exchange traded grantor trusts.

5. Champion Capital Research, Inc. 5 What are ETFs?: The Primary Providers ProviderNameAssets Managed BarclaysiShares $248.5 billion State StreetStreetTracks $100.3 billion Bank of NYBNY $26.8 billion VanguardVIPER’s $24.2 billion PowerShares $9.3 billion Rydex $3.8 billion  Data as of 2007

6. Champion Capital Research, Inc. 6 What are ETFs?: Explosive AUM Growth CAGR= 38.5%  Source: Investment Company Institute 2006

7. Champion Capital Research, Inc. 7 What Are ETF’s: ETF Options Data as of Jan 2007

8. Champion Capital Research, Inc. 8 What Are ETFs?: Creation/Redemption Process  Index provider (S&P, Dow Jones, etc.) announces changes in index.  Fund manager (Barclays, State Street, etc.) announces the contents – holdings and wtds - of the new creation units.  A Market Maker (authorized participant (AP)) buys basket of securities in market then delivers the basket to the fund (trustee), which creates and delivers to AP the appropriate ETF units.  The AP receives newly created fund shares and makes available to investors.  The ETF will be custodied wherever investor clears trade.

9. Champion Capital Research, Inc. 9 What Are ETFs?: Creation Process Investor Brokerage account Cash ETF Shares Securities ETF Authorized Participants Capital Markets Creation UnitsBasket of Securities ETF Fund Advisor Cash

10. Champion Capital Research, Inc.10 Benefits and Applications

11. Champion Capital Research, Inc. 11 Benefits: The Good  Transparency  Full market participation  Style Consistency  Trading flexibility  Low costs

12. Champion Capital Research, Inc. 12 Benefits?: The Bad and Ugly  Dollar cost averaging hurdle  Float adjustment  Tax consequences  Dividend “Drag”  Market Volatility  Interest Rate and Credit Risks

13. Champion Capital Research, Inc. 13 Applications: Diversification  Investment minimums  Correlation and factors analyses  Cost effective dynamic diversification  Minimize concentrated portfolios  Exploit global growth and currency opportunities

14. Champion Capital Research, Inc. 14 Applications: Risk Management  Real time risk management  Dynamic beta adjustments  Active indexing or “tilting”  Duration management  “Equitize” cash  Limit and stop orders  Hedging options

15. Champion Capital Research, Inc. 15 Applications : Tax Management  Low turnover through relatively passive management  The creation/redemption process involves in-kind transfers, a non-taxable event  Tax loss harvesting  After tax alpha through cross sectional rotations

16. Champion Capital Research, Inc.16 Portfolio Strategies

17. Champion Capital Research, Inc. 17 Portfolio Strategies: Strategic & Dynamic Strategies  Strategic long term diversified portfolios – including strategic MVO with simple re-balancing  Enhanced indexed portfolios  Easily achieve broadly diversified portfolio from concentrated portfolio  Combine ETFs with active managers – including Core Satellite  Develop Risk budgeting techniques

18. Champion Capital Research, Inc. 18 Portfolio Strategies: Implementation Science (Modern Portfolio Theory) + Art (The Mix Between Index and Active) + Client Expectations (Understanding Tolerance to Risk) 2002-iS-0705

19. Champion Capital Research, Inc. 19 Portfolio Strategies: Traditional MVO Potential Return % Risk % (Std) Bills TSY Bonds Large-cap domestic stocks Small-cap domestic stocks International stocks

20. Champion Capital Research, Inc. 20 Portfolio Strategies: Dynamic & Tactical Opportunities  Sector, style, country allocations  Express business cycle views  Greater international diversification beyond EAFE  Wider re-allocation bands allow for consistent alpha  Yield curve and credit quality management possible at all portfolio account sizes

21. Champion Capital Research, Inc. 21 Portfolio Strategies: Dynamic Top Down Management 2019-iS-0705 Source: BGI, Dow Jones, Bloomberg Utilities Financial Consumer goods Fed Funds rate

22. Champion Capital Research, Inc. 22 Portfolio Strategies: Enhanced MVO Portfolios Traditional MVO Portfolios Tactical Sector / Country Allocations

23. Champion Capital Research, Inc. 23 Portfolio Strategies: Broad Diversification 2019-iS-0705  Source: BGI

24. Champion Capital Research, Inc. 24 Portfolio Strategies: These Strategies Work!  As of 12/31/06

25. Champion Capital Research, Inc. 25 Portfolio Strategies: Because of Low Fees Strategy / Fees (in bps) CCR Strategic MF Industry Average CCR Strategic ETF CCR Tactical ETF CCR International Satellite CCR Emerging Satellite Low Risk671172022 Conservative821302526 Moderate891362729 Growth1011473134 Growth Plus110152333759 * Morningstar and Champion 2_07 Lowest fees in each strategy N/A

26. Champion Capital Research, Inc. 26 Portfolio Strategies: Fees Matter Growth Model Fees34 bps101 bps147 bps Gross Value$2,593,742.46 Fees$59,605.97$177,064.79$257,708.16 Earnings Not Received$23,077.71$62,939.74$98,605.40 Net Value$2,511,058.78$2,353,737,93$2,237,428.90

27. Champion Capital Research, Inc. 27 Portfolio Strategies: Core / Satellite  Traditional indexed “core” and satellite managers  New “satellite” structures  Plug ETFs with existing managers  Manage market risk (  tracking error  and active risk (    strategies can be governed by unique guidelines  Rebalancing efficiencies

28. Champion Capital Research, Inc. 28 In order to reset portfolio to original strategic weights, sell 20% value manager/fund and buy 20% growth manager/fund. 50% Growth 50% Value 30% Growth 70% Value 50% Growth 50% Value Portfolio Strategies: Rebalance Opportunities 2019-iS-0705  Source: BGI

29. Champion Capital Research, Inc. 29 1. $200,000 taxable portfolio 2. Strategic asset allocation – 50% value / 50% growth 3. Active/index blend – 50% active / 50% index Portfolio Strategies: Rebalance Opportunities 2019-iS-0705 Source: BGI analysis.

30. Champion Capital Research, Inc. 30 1. Portfolio grew to $210,000 2. Value outperformed growth 3. Index growth outperformed manager growth manager 2019-iS-0705 Source: BGI analysis. Portfolio Strategies: Rebalance Opportunities

31. Champion Capital Research, Inc. 31 1.New portfolio = 210,000 2.Strategic weights = 50/50. 3.Allocate 105,000 to each asset class. 4.Sell 15,000V; Buy 15,000G 5.Decision is to sell/buy active/index. 2019-iS-0705 Source: BGI analysis. Portfolio Strategies: Rebalance Opportunities

32. Champion Capital Research, Inc. 32 2019-iS-0705 Source: BGI analysis. Portfolio Strategies: Rebalance Opportunities

33. Champion Capital Research, Inc. 33 Portfolio Strategies: International Satellites

34. Champion Capital Research, Inc. 34 Portfolio Strategies: Budget Risk Source: BGI analysis. 246 Tracking error (%) Active return (%) Benchmark (Russell 1000) 5.5 8 Moderate Risk Index fund 65% Active mgr 35% Moderate Risk Index fund 65% Active mgr 35% How much active manager risk? Higher Risk Index fund 20% Active mgr 80% Like traditional risk / return analysis, identify clients risk tolerance. In Core Satellite construction, identify client’s propensity to endure both active and passive volatility.

35. Champion Capital Research, Inc. 35 Portfolio Strategies: Refining within classes Potential returns (%) Risk (%) 0 Russell 1000 MSCI EAFE Lower Active Risk Index fund 65% Active mgr 35% 6% Active Risk Budget 2% Active Risk Budget Higher Active Risk Index fund 20% Active mgr 80% 2002-iS-0705 Source: BGI analysis.

36. Champion Capital Research, Inc. 36 Summary  What are ETF’s?  Construction Methodology, Growth, Providers  www.ActiveIndexing.com, www.IndexUniverse.com www.ActiveIndexing.com  Benefits and Applications  Costs, Liquidity, Diversification, Risk management, Tax management, Concentration, Rebalancing  Practical Portfolio Strategies  Traditional MVO, Enhanced Indexing, Core Satellite, Risk Budgeting

37. Champion Capital Research, Inc.37 Discussion Mary Kathryn Campion, Ph.D., CFA, AIF Champion Capital Research, Inc. Campion@championcapitalresearch.com 713.435.4374 December 2005

38. Champion Capital Research, Inc. 38 Portfolio Strategies: Tracking error

39. Champion Capital Research, Inc. 39 Portfolio Strategies: Top Down Management Source: BGI and Dow Jones. 2019-iS-0705 Fed tightens policy Fed begins easing policy

40. Champion Capital Research, Inc. 40 Portfolio Strategies: Managing  and    Active manager return  The over- or under-return earned by an active manager relative to a benchmark  Active manager risk  The annualized standard deviation of a manager’s active return (usually calculated as tracking error) 2002-iS-0705