Trackers are easy to use.

With just one transaction, you can put together a highly diversified portfolio. You do not need to buy shares in individual companies because with trackers you are investing in an entire index. Trackers combine the simplicity of shares with the diversified risk of investment funds.

Trackers are transparent.

The price of a tracker roughly corresponds to a fixed percentage of the underlying index, also known as the reference index, and to ensure tradability is usually one-tenth or one-hundredth of the level of the index. For example, if the level of the index is 500 points and one tracker relates to one-tenth of the index, the price of the tracker will be about € 50.

Differences between the price of a tracker and the level of the corresponding index may be due to accumulated dividends and management fees. The prices of trackers that reinvest their dividend income differ more sharply from the level of the index.

To keep investors continually updated on how their trackers are performing, Euronext publishes the following data on its website:

• The level of the reference indices is published continually.

• The net asset value (NAV) of trackers;

• The indicative NAV of trackers is based upon the net asset value but is updated every 15 seconds throughout the trading day.

Trackers are suitable for many investment strategies.

Trackers are a suitable choice for a whole range of investment strategies, including long-term investment, short-term trading, and benchmarking (using trackers instead of constituent shares to reproduce a specific index). In addition they can be used as a professional instrument for hedging risks, for optimising trading in corresponding index derivatives, for cash equitisation (temporarily converting cash into equities) and for arbitrage, etc.

Trackers are economical.

Buying trackers allows you to obtain a diversified investment in an index, and yet pay nothing more than the normal transaction fees for a single share. Management fees for trackers are low, and there are no commission or administrative fees. On top of this, like shares, most trackers pay dividends.

Trackers are readily tradable.

Trackers can be bought and sold at any time during a trading day at a price that is in line with the market. Liquidity comes from various sources, including professional basket trading, derivatives trading, and from trading in trackers themselves. The market is supported by liquidity providers, which are market participants that ensure that trackers can always be traded, even if there are not enough buy and sell orders in the market.

• Buy-and-hold strategy

Trackers allow you to participate in long-term general market developments or trends in a specific sector. You can keep your trackers as long as you want.

• Short term trading

Because trackers are so tradable and follow the reference index so closely, they are a good short-term investment.

• Alternative to basket trading

Buying trackers is easier and cheaper than buying all the shares that together make up the corresponding index.

• Strategies involving options and futures on the same reference index

Trackers can be used to hedge and optimise positions in derivatives on the same index.

• Easy and cheap international portfolio management

With just one transaction, trackers give you efficient, flexible and transparent exposure to a whole country, region or sector. You can also use them to invest in pan-European and international shares, paying only local commission.

• Core/satellite asset allocation

Trackers are ideal in a core/satellite asset allocation strategy. The core can consist of trackers on broad indices and the satellites can be made up of trackers on sector indices that cover specific fields such as telecommunications, technology, pharmaceuticals and banking.

• Cash equitisation

Trackers can be used to convert cash into equities temporarily, until you make a final decision on which companies to invest in. This strategy is of particular interest for investment fund managers.

• Arbitrage with derivatives or constituent shares

You can trade trackers to profit from any differences between their price and the price of the shares included in the reference index or derivatives based on that index.

A tracker is a cash product; futures and options are derivative products. The differences can be summarised as follows.

• Most trackers pay regular dividends, once or twice a year. Options and futures do not pay dividends. However, once options and futures have been exercised, the underlying may of course pay dividend.

• Trackers have no expiry date, so they are suitable for long-term investments. Futures and options expire after a specified date and are usually used on a more short-term basis. Investors who want to hold on to derivatives after the expiry date have to roll over into a later expiry month.

How do trackers differ from index certificates?

Index certificates are derivatives as well, but they generally have a longer lifetime than futures and options. They differ from trackers in four important ways.

• Index certificates do not pay dividends.

• Index certificates have a fixed expiry date, after which they are worthless.

• Trading in index certificates is usually dependent on support from the issuer.

• Index certificates are not issued by open-ended investment funds, which means that their quantity is restricted.

How do trackers differ from traditional investment funds?

• Trackers are listed on the exchange and can be bought and sold throughout the trading day. Many investment funds are not listed and can only be traded once a day.

• The market value of the invested capital (indicative NAV) is calculated and disseminated by Euronext every 15 seconds.

• Trackers follow the performance of their reference indices very closely. The unique process of creation and redemption ensures that the tracking error in relation to the reference index is very small.

• Because trackers follow the reference index, they provide some assurance with regard to expected yields, and management costs are lower. Traditional investment funds, by contrast, try to outperform benchmark indices.

Trackers are taxed in the same way as investment funds. For more information on the tax treatment of a specific tracker, please consult your financial adviser or the prospectus of the tracker in question.

Trackers are issued by means of a unique creation and redemption mechanism. Any deviations from this mechanism are stated in the relevant prospectus.

The creation and redemption mechanism is the process by which the fund manager issues and cancels tracker shares. This is done by exchanging trackers for baskets of shares that correspond to the composition of the reference index. This can be done on a continuous basis, as trackers are open-ended investment funds. Creation and redemption can also be done on a cash basis.

Creation and redemption: exchanging trackers for shares

The creation and redemption process gives investors the opportunity to exchange underlying shares for a number of trackers (creation) or to exchange trackers for the underlying shares (redemption). Any differences in value are made up in cash.

Professional market participants handle the creation and redemption of trackers in accordance with the terms of a special agreement concluded with the tracker’s fund manager.

Advantages of the unique creation and redemption process

The process of creating and redeeming trackers in kind (accompanied by a cash payment) ensures low management costs and optimum correlation between the tracker and the reference index.

Market participants use the arbitrage principle during the creation and redemption process. The actual price of a tracker is determined by supply and demand and this can result in a difference between the tracker price and the price of the basket of shares corresponding to the reference index. Market participants use arbitrage to even up the price difference.

Cash amount

The cash amount that market participants pay to create trackers and receive when they redeem them can include accumulated, unpaid dividend.

Minimum order size for creation and redemption

The size of the block of tracker shares that can be created or redeemed is called the creation or redemption unit, and is determined by the tracker’s fund manager. For example, trackers can be created in blocks of 50,000 or 100,000 tracker shares.

Creation and redemption on a cash basis

Depending on the specifications of the tracker, creation and redemption can be done in exchange for a cash payment. However, the manager’s costs will usually be higher as the number of tracker shares involved in the transaction is generally less than the creation and redemption unit.

Market participants in the primary market

In principle, both private and professional investors can create or redeem trackers with the tracker fund, although the rules and procedures differ from one tracker to the next. In practice, it is almost always professional investors who are involved in the creation and redemption process. The minimum number of tracker shares that can be created or redeemed is between 50,000 and 100,000, which is too much for private investors. They usually trade trackers via the secondary market, like shares.

Two parties are active in the primary market for trackers:

• the manager of the tracker fund, responsible for issuing and redeeming trackers;.

• market participants, who have the fund manager’s permission to place orders for creation and redemption..

Net asset value (NAV)

The net asset value reflects the market value of the net assets of the tracker fund, and is equal to the balance of the fund’s assets and liabilities, divided by the number of issued tracker shares. The fund manager publishes a new official net asset value every day at a fixed time.

Indicative NAV

The indicative NAV of a tracker is published by Euronext, and in a few cases by the fund manager too. This figure is based on the net asset value that is calculated each day. The indicative NAV is updated every 15 seconds so that it reflects changes in the reference index throughout the day. The indicative NAV is published continuously on www.euronext.com (with a delay of at least fifteen minutes) and is also disseminated by most of the commercial data vendors. If calculation of the reference index ceases or is interrupted for any reason, Euronext will stop calculating the indicative NAV of the corresponding trackers. Euronext announces any changes in the method used to calculate the indicative NAV of a tracker.

Secondary trading is defined as all trading in trackers from the moment of their creation until their redemption. At Euronext, trackers are traded in the NextTrack product segment.

Market participants in the secondary market

All categories of investors, including private, professional and institutional investors, have access to the secondary market. Members of Euronext have direct access to the market.

The following parties are active in this market:

• Euronext members, which have direct access to the trackers traded on the exchange;

• Non-members, i.e. professional and private investors who buy and sell trackers via a member;

• Liquidity providers, which provide continuous bid and offer prices for trackers. With a few exceptions, there are at least two liquidity providers for each tracker traded on NextTrack.

How are trackers bought and sold?

Investors wanting to buy or sell trackers can place an order with their bank or broker, just as they do for shares. The price at which the order is executed depends on supply and demand at the time the order is placed.

To avoid errors, investors are advised to state the name and security code of the relevant tracker very clearly when placing an order. This information is available in the tracker list.

The chart below illustrates the relationship between the primary and secondary market.

The primary market is the issuing market, where trackers are created by fund managers. They are subsequently traded in NextTrack, the secondary market, but redeemed in the primary market.

Two factors can influence the interaction of the primary and second markets.

• The indicative NAV, which reflects the actual value of the tracker’s assets and is based on the value of the shares that make up the reference index on which the tracker is based, plus any synthetic components. The indicative NAV is important for market participants that create and redeem trackers in the primary market.;

• The price of a tracker in the secondary market, based on supply and demand.;

In most cases, the difference between the indicative NAV and the tracker’s price is minimal. However, any differences that are due to market conditions can create attractive opportunities for arbitrage between the tracker and the index constituents, both for market participants and liquidity providers. Arbitrage reduces differences between the price of the tracker and the indicative NAV.

For example, when the tracker’s price falls below the indicative NAV, it can be profitable for market participants to buy trackers in the secondary market, take on a short position in the relevant index shares and then ask the fund manager to exchange the trackers for shares before closing the short position at a profit.