Download the Accessing Core Market Exposure Presentation

Accessing Core Market Exposure:
Market-Cap vs. Equal vs. Fundamental Weighting
Live Webinar
January 20, 2011 2-3 p.m. EDT

Accessing Core Market Exposure
Matt Hougan
Global Head of Editorial
President, ETF Analytics
IndexUniverse
Why even consider alternatives?
What are the risks?
Has the actual performance been good?
Alternatives in special situations.

Our Panelists
Anthony Davidow
Managing Director, Portfolio Strategist
Rydex | SGI
Christian Wagner
Chief Executive Officer & CIO
Longview Capital Management

Traditional Index Funds
Percentage of Equity Mutual Funds Indexed
Low cost
Tax efficient
Source: ICI Factbook.
Lower risk

S&P 500 Index
Why Consider Alternative
Indexes?
Dot-com Bust
S&P 500
Equal Weight
Index Launch
Research Affl.
Launches
Fundamentally
Weighted
ETFs
WisdomTree
Launches 20
Dividend
Weighted
ETFs
Sources: Bloomberg, S&P, Rydex, PowerShares, WisdomTree

Why Consider Alternative
Indexes?
Weight Matters!

Market-Cap Weighting vs.
Alternative Strategies
Vs.
Irresistible Force
Immovable Object
7

Market-Cap
Index “Flavors”
Pure
Free-float adjustment
Limit individual security weight
Limit sector weight

Equal Weight Index
“Flavors”
Conventional EW (“CEW”)
Sector Equal Weight

Fundamental Index
“Flavors”
Factors:
Dividends
Revenue
Earnings
Cash Flow
Book Value
Selection
Weighting
Time frame

SELECTION
WEIGHTING
Market Cap Weight Market Cap Market Cap
Conventional Equal
Weight
Fundamental (a.k.a.
Economic) Weight
Market Cap
Fundamentals (e.g.,
sales, book value,
dividends, earnings,
cash flow)
Equal Value of each
security
Fundamentals (e.g.,
sales, book value,
dividends, earnings,
cash flow)

Efficiency Comparisons
Actively
Managed
Alternative
Indexes
Market Cap
Weighted
Index
Turnover
Expense
Ratios
Cap. Gains Risk
50% - 100+% 0.30% ->2% High
15% -
30+%

Composition Differences
Sector Tilts
Value / Growth Tilts
Market Cap Tilts

Jul-96
Jul-97
Jul-98
Jul-99
Jul-00
Jul-01
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Cap Weight's Sector Tilts
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Russell 1000 CapWeight
Utilities
Technolgy
Durables
Materials
HealthCare
Financial Services
Energy
Consumer Staples
Consumer Discretionary
Sources: Russell Investments

Equal Weight Sector Tilts
S&P 500
SPY
S&P 500 EW
RSP
R1000 Sector
EW
EWRI
Information Technology 19.0% 15.6% 11.1%
Financials 16.0% 16.1% 11.1%
Energy 11.9% 8.2% 11.1%
Industrials 11.0% 11.6% 11.1%
Health Care 11.0% 10.1% 11.1%
Consumer Discretionary 10.6% 15.5% 11.1%
Consumer Staples 10.4% 8.0% 11.1%
Materials 3.8% 6.2% 11.1%
Telecomm. Services 3.0% 1.8% 11.1%
Utilities 3.0% 6.6% 11.1%
Sources: SSgA, Russell Investments and Rydex
May not sum due to rounding.

Fundamental Sector Tilts
S&P 500
SPY
Earnings
EPS
Dividend
DLN
Revenue
RWL
Composite
PRF
Information Tech. 19.0% 19.1% 9.8% 9.3% 10.5%
Financials 16.0% 15.6% 9.2% 15.1% 21.1%
Energy 11.9% 11.9% 11.5% 12.9% 12.5%
Industrials 11.0% 9.5% 11.5% 11.1% 12.0%
Health Care 11.0% 11.2% 12.9% 12.2% 8.8%
Cons. Discretionary 10.6% 10.0% 7.6% 13.0% 11.6%
Consumer Staples 10.4% 11.4% 18.0% 15.4% 9.1%
Materials 3.8% 3.1% 3.3% 3.6% 3.9%
Telecomm. Services 3.0% 3.2% 8.5% 3.3% 4.8%
Utilities 3.0% 3.4% 6.1% 3.6% 5.2%
Sources: SSgA, WisdomTree, RevenueShares and PowerShares
May not sum due to rounding.

Value Tilts
Market
Cap Dividend Earnings Revenue Fund. Equal
SPY DLN EPS RWL PRF RSP
P/PE 13.6 12.9 12.6 13.3 13.5 14.8
P/B 2.2 2.4 2.2 1.9 1.7 2.1
Div. Yield 2.1 3.2 2.3 2.2 2.4 2.0
Source: Morningstar. P/PE is price to prospective earnings.

Top-Tier Bottom Returns

Performance

Different Methods = Different Results
Source: Bloomberg

Different Methods = Different Results
Source: Bloomberg

Different Methods = Different Results
Source: Bloomberg

Alternative ETF Actual Results
3-Year Results* Total Return Worst Case Volatility
S&P 500 - SPY -2.8% -51.5% 30.2%
Russell 1000 - IWB -1.0 -51.9 29.3
LargeCap Dividend - DLN -9.3 -54.0 29.8
Earnings 500 – EPS -2.6 -50.9 21.6
LargeCap Revenue – RWL* 2.4 -54.8 30.9
RAFI Fundamental Comp. 1000 -– PRF 7.8 -55.6 32.9
S&P 500 Equal Weight - RSP 13.0 -55.8 33.5
* Results are from 1/14/08 to 1/12/11 except for RWL, which incepted 2/2/2008.
Source: Kwanti
23

Fundamental ETF Correlations
3-Year
Correlation
Dividend
DLN
Earnings
EPS
RAFI Comp.
PRF
S&P 500 Equal
RSP
S&P 500 Equal
Sector Weight
EQL
IWB – Russell
1000
0.98 0.90 0.94 0.97 0.90
IWD – Russell
1000 Value
0.98 0.89 0.93 0.94 0.87
* Results are from 1/14/08 to 1/12/11.
Source: Kwanti
24

Where
To?

Market-Cap Weighting …
…works well when …
• Large cap outperforms
• Growth outperforms
• Bubbles form
but falter when …
• Small cap outperforms
• Value outperforms
• Bubbles burst

Equal Weighting …
… works well when …
• Small cap outperforms
• Bubbles burst
• Sectors overweights
outperform
but falters when …
• Large cap outperforms
• Bubbles form
• Sector underweights
underperform.
Interesting In: Emerging Markets

Fundamental Weighting …
… works well when …
• Small cap outperforms
• Value outperforms
• Bubbles burst
But falters when …
• Large cap outperforms
• Growth outperforms
• Bubbles form

Summary
• Alternative weighting applications:
• Replace market-cap beta
• Tactical shifts
• Look under the hood!

Our Panelists
Anthony Davidow
Managing Director, Portfolio Strategist
Rydex | SGI
Christian Wagner
Chief Executive Officer &
Chief Investment Officer
Longview Capital
Management

Thank You
For more information:
IndexUniverse.com
Information on Continuing Education
credits will be sent by email after a
recording of this webinar is posted on
IndexUniverse.com.