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Model Insight - Modeling Exchange Traded Funds with Barra Premium ETF Analytics - February 2013

Exchange Traded Funds (ETFs) can provide investors with a low-cost, flexible, and transparent instrument to gain exposure to a number of markets and sectors; however, modeling ETFs present challenges because they are heterogeneous.  In this white paper, we explain how Barra meets this challenge by using two methods—look-through and style analysis. These approaches can generate exposures to systematic risk factors and idiosyncratic risk for over 3,500 exchange traded instruments, including the most commonly traded ETFs and ETNs.  Barra’s Premium ETF Analytics can be used to attribute performance and risk, to forecast volatility, to estimate correlations of funds with one another and with other instruments, and to test macroeconomic stresses.