1

Exchange Traded ProductsThe differences between ETFs & ETNs & ETCs

2

What are Exchange Traded Products?

Exchange Traded Products (ETPs)

Fastest growing product class traded on an exchange Cost effective access to an asset class Available on a wide range of equity & fixed income indices and single commodities Comprised of ETFs, ETNs, (and ETCs)

Exchange Traded Funds (ETFs) are mutual funds and can be: Physical ETFs - which hold the index securities Swap-based ETFs - which replicate the index performance through the use of swaps

Exchange Traded Notes (ETNs) are debt instruments: There are several sub-categories, such as Exchange Traded Commodities (ETCs) Often ETNs are used to offer exposure to assets that can not be achieved with a fund, for example

single commodities

3

Global ETP Growth

Source: ETF Research and Implementation strategy team, BGI, Bloomberg. As of April 2009

4

Why are there different legal structures?

Many investors prefer a mutual fund structure

Investor protections & regulations UCITS, SEC 1940 Act, Unit Trusts, OEICs, etc… Governed by a Prospectus, with regular accounts and reports Portfolio is mutually owned by investors, not product provider

Familiarity & comfort of structure Majority of Retail assets held in pooled products are in mutual funds

Some asset classes are not available in a mutual fund structure

Single Commodities Foreign exchange Options strategies

Principal protected investments Buy/write or covered call

5

How do Physical ETFs obtain their economic exposure?

Source: Barclays Global Investors1 Fund domiciled and managed in Germany2 Subfund of iShares plc managed in Ireland3 Subfund of iShares II plc managed in Ireland4 Subfund of iShares III plc managed in Ireland.

All holdings are published on a daily basis on www.ishares.com

% Name Market price

Country

6.53 TOTAL SA 40.67 France

5.04 TELEFONICA SA 16.08 Spain

4.28 BANCO SANTANDER SA 7.00 Spain

4.07 E.ON AG 28.88 Germany

3.70 SANOFI-AVENTIS 46.82 France

3.36 GDF SUEZ 34.00 France

3.32 ENI SPA 17.83 Italy

3.30 SIEMENS AG-REG 52.96 Germany

3.24 NOKIA OYJ 11.15 Finland

2.96 FRANCE TELECOM SA 20.37 France

Cash-based ETFs track performance by buying underlying securities

iShares DJ EURO STOXX 503

As at 08/01/2009

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How do Swap based ETFs obtain their economic exposure?

iShares Dow Jones STOXX 600 Telecommunications Swap (DE)1

As at 31/03/2008

Swap Based ETFs „outsource“ index tracking by entering a swap agreement Swap-based ETFs buy securities In addition a swap is structured

Holdings for swap-based funds are published in annual reports

Equities # of shares in 1000

Weight

Adidas AG 85,204 4.27

Allianz SE 31,760 4.74

Assicurazioni Generali 130,742 4.43

BASF SE 42,823 4.35

Bayer AG 65,464 3.96

BNP Paribas S.A. 61,569 4.68

Carrefour S.A. 80,459 4.68

Commerzbank AG 188,806 4.45

Continental AG 56,161 4.32

Daimler AG 71,611 4.62

Basket + Swap

Source: Barclays Global Investors1 Fund domiciled and managed in Germany2 Subfund of iShares plc managed in Ireland3 Subfund of iShares II plc managed in Ireland4 Subfund of iShares III plc managed in Ireland

Swap CounterpartyETF

7

ETF Swap Mechanism

Equity basket performance: increase from €100 to €105

ETFSwap

Counterparty

Total return index performance: increase from 100 to 107

Payments from swap agreement

Leg II pays €7

Leg I pays €5

Swap-based ETFs buy securities i.e. Swap-based Sector iShares buy basket of liquid stocks of DJ Global 1800 universe

In addition a swap is structured Leg I: pays performance of equities Leg II: receives performance of total return index, that is tracked

- 5€ + 7€ = +2€

ETF NAV:105€ + 2€ = 107€

8

How do ETNs obtain their economic exposure?

The ETN is a debt obligation of the issuer that is linked to a derivative. An ETN looks similar to a Swap based ETF, except there is no basket of securities.

Differences between Swap based ETF & an ETN:

Legal structure (Fund vs. Debt) Collateralization

UCITS are required to collateralize 90% of counterparty exposure Notes may use collateral, but are not required

Why does the swap matter?

Counterparty risk in the derivative contract (swap) Variable cost of swap paid to counterparty over time, not in the TER (a “swap spread”) Creates a single dealer trading model for the ETN/ETF shares on exchange

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How to quantify counterparty risk

The cost of buying protection against default is the CDS spread

Credit Default Swaps (CDS) ensure against default of a counterparty

Source: Barclays Capital, as at 13/01/2009

0

25

50

75

100

125

150

175

200

225

250

275

Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08

Cre

dit

Def

ault

Sw

ap S

prea

d in

bps

Hypo-Vereinsbank AG Subordinated 1Y CDS (185.31 bps as of 13/01/2009) Societe Generale Subordinated 1Y CDS (121.56 bps as of 13/01/2009)

Deutsche Bank AG Subordinated 1Y CDS (217.80 bps as of 13/01/2009)

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Why does this matter?

Swap based ETFs & ETNs can be creditors to the Counterparty.

Corporate action on Counterparty can greatly reduce liquidity.

September 15 – 19th, 2008 highlighted Counterparty risks in ETPs

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Gold on Tuesday (16/09/2008): No Bid or Offer

Source: Bloomberg

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Gold on Friday (19/09/2008): Still No Bid or Offer

Source: Bloomberg

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Examples of each type of ETP structure

Physical-based Derivative based

ETFs All iShares Dublin domiciled ETFs, e.g.- iShares FTSE 100- iShares £ Corporate Bond- iShares Index Linked Gilts etc

CS XMTCH

Lyxor

db x-trackers

iShares DE SWAP sector

ETNs Gold Bullion Securities ETF Securities (other)

14

Comparing ETFs and ETNsPart 1

  Exchange Traded Funds (ETFs) Exchange Traded Notes (ETNs)

Exchange listed Yes Yes

Easy accessible investment vehicles for a range of asset classes

Yes Yes

Low Tracking Error Yes Yes

Low costs Yes Mostly

Exposure to market risk of the asset class / index

Yes Yes

Structure Mutual Fund Note

UCITS Fund Mostly No

Underlying holdings Index securities for physical ETFs

Index swap plus a basket of non-index securities for

swap-based ETFs

N/A

Source: BGI

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Comparing ETFs and ETNsPart 2

  Exchange Traded Funds (ETFs) Exchange Traded Notes (ETNs)

Fund/note issuer risk No,mutual funds hold assets in ring-fenced segregated

accounts or ring-fenced fund company

Yes, bears exposure to credit worthiness of

note issuer

Swap counterparty risk No,for physical ETFs

Yes, for swap-based ETFs

limited to 10% under UCITS and sometimes reduced

further through ETF provider

No

Other counterparty risk considerations

Securities lending activity and collateralization of such activity

Some notes are backed by collateral or guarantees to decrease issuer risk

Transparency Yes, Full holdings disclosed for

physical ETFs

Limitedfor swap-based ETFs

Limited

Competitive Multi Dealer Model to trade on and off exchange

Yes, for physical ETFs possible

Limited,for swap-based ETFs

Limited

Source: BGI

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Disclaimer

Regulatory Information

Barclays Global Investors Limited ('BGIL'), which is authorised and regulated by the Financial Services Authority ('FSA'), has issued this document for access by Professional Clients in the UK only and no other person should rely upon the information contained within it. iShares plc, iShares II plc and iShares III plc (together 'the Companies') are open-ended investment companies with variable capital having segregated liability between their funds organised under the laws of Ireland and authorised by the Financial Regulator. The German domiciled funds are "undertakings for collective investment in conformity with the directives" within the meaning of the German Law on the investments. These funds are managed by Barclays Global Investors (Deutschland) AG which authorised and regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht.

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