Investing with Exchange-Traded Funds Made Easy: A Start-to-Finish Plan to Reduce Costs and Achieve Higher Returns Book

Acknowledgments xv

About the author xvii

Chapter 1 Exchange-Traded Funds (ETFs): Now Individuals Can Invest Like the Big Players 1

ETFs Are a Special Type of Mutual Fund 2

ETFs Avoid the Expense of Fund Managers 2

ETFs Are Traded on Exchanges 4

ETF Investors Have Hidden Costs Through the Bid-Ask Spread 7

The Creation/Redemption Process Keeps ETF Share Prices Close to the Market Value of the Underlying Shares 16

ETF Performance Is Not Weighed Down by Transaction Costs 21

ETF Shares Are Often More Tax-Efficient Than Mutual Funds 21

Special Risks of ETFs 22

Conclusion 23

Endnotes 24

Chapter 2 The Multifaceted Stock Market: A Guide to Different Investment Styles 25

The First Decision: Stocks, Bonds, or Cash 26

Size Matters 29

Each Investment Style Has Multiple ETFs 34

Conclusion 40

Endnotes 40

Chapter 3 A One-Step Strategy for Selecting Superior Investments: Indexing 43

Investments That Track Market Indexes Have Outperformed Most Mutual Funds 46

The Evidence in Favor of Indexing 47

Indexing Has Delivered Greater Profits Than the Average Mutual Fund, Except in the Small-Cap Area 49

How a Few Mutual Fund Managers Have Beaten the Indexes 50

Conclusion 52

Appendix to Chapter 3–Index Construction Methodologies 53

Endnotes 56

Chapter 4 Investment Risk: A Visit to the Dark Side 57

Drawdown–An Intuitive Measure of Investment Risk 58

A 43-Year History of Bear Markets 64

What if Your Investment Was Not Around During a Bear Market? 70

Example of Risk Assessment: An Emerging Market ETF 73

Market Risks and Planning for Your Future 77

Appendix 4A: Where to Find Quantitative Investment Risk Information 79

Appendix 4B: Calculation of Drawdown with a Spreadsheet 79

Appendix 4C: Volatility of Past Returns as a Risk Measure 83

Endnotes 86

Chapter 5 How Well Are Your Investments Really Doing? Risk-Adjusted Performance 87

The First Risk-Adjusted Performance Measure–Annual Gain-to-Drawdown Ratio 88

Another Risk-Adjusted Performance Measure–The Sharpe Ratio 91

Risk-Adjusted Performance Review 94

Conclusion 96

Appendix 5A–Calculation of the Compounded Annual Rate of Return 96

Appendix 5B–Calculation of the Sharpe Ratio 98

Endnote 101

Chapter 6 Diversification: The Only Free Lunch on Wall Street 103

Reduce Risk, Not Profits, with Diversification 104

Diversification versus Picking Only the Best 106

How to Determine What Should Be in the Optimal Portfolio 107

Example–Determining a Good Mix of Stocks and Bonds 108

Interpretation of the Sharpe Ratio 110

The Uncertainty of Future Investment Returns 110

Conclusion 113

Endnote 113

Chapter 7 The One-Decision Portfolio 115

A Risk-Reducing Investment Mix 116

Indexes Used to Test the One-Decision Portfolio 119

Performance History for the One-Decision Portfolio 119

The One-Decision Portfolio for Less Conservative Investors 123

ETFs You Can Use to Create Your Own One-Decision Portfolio 124

Rebalancing 126

Why Are Only U S Investments Included in the One-Decision Portfolio? 127

Conclusion 128

Appendix to Chapter 7–A Brief Discussion of the Bond Market 129

Endnotes 133

Chapter 8 When to Live Large: An Asset Allocation Model for Small- versus Large-Cap ETFs 135

Why Market Capitalization Matters 136

Trading Rules 138

Results 139

Real-World Implementation with ETFs 142

Conclusion 145

Appendix to Chapter 8–ETF Distributions and Taxes 146

Chapter 9 Boring Bargains or Hot Prospects? Choosing between Growth andValue ETFs 151

The Concept of Relative Strength 154

History of Relative Strength Changes between Growth and Value 156

Recognizing the Emergence of a New Trend Using the Relative Strength Ratio 161

Results with Small-Cap Value versus Growth 165

Results with Large Cap Value versus Large Cap Growth 168

Real-World Implementation with ETFs 169

Conclusion 171

Chapter 10 When Is It Safe to Drink the Water? International Investing 173

How to Identify Whether the Long-Term Trend Favors U S or Developed-Country

Foreign Stocks 179

Results of Using the EAFE/S&P 500 Asset Allocation Model 182

Emerging Market ETFs–Investing for the Future 185

Outlook for International Investing 188

Conclusion 189

Chapter 11 What Bonds Can Tell You about Stocks: How to Use Interest Rates 191

A Basic Introduction to the Bond Market 192

Why Rising Interest Rates Have Usually (But Not Always) Been Bad for Stocks 193

An Indicator of Rising Interest Rates 196

Yield Curve Indicator 197

Composite Interest Rate Indicator 203

Conclusion 205

Chapter 12 It’s a Jungle Out There: Selecting from Among Different ETFs with Similar Investment Objectives 207

The Drawdown Chart–A New Tool 208

Example 1–Small-Cap ETFs 211

Example 2–Growth Versus Value ETFs 214

Example 3–Utility Sector ETFs 218

Conclusion 221

Endnotes 222

Chapter 13 The Ultimate ETF Investment Program for 30 Minutes per Month 223

The Ultimate ETF Investment Program 224

Results of the Ultimate ETF Strategy 230

Conclusion 231

Chapter 14 ETF Strategies for Investment Income 237

The Ideal Income Investment–A Payout That Grows over Time 238

If You Want High Dividends, You Have to Like Financial Stocks 239

Where to Find High-Dividend ETFs 240

A Unique High-Dividend Portfolio 243

Preferred Stock ETFs 244

Conclusion 248

Chapter 15 The Hottest Investments Around: Commodity ETFs 251

Primer on Commodity Investing 254

Absentee Ownership of Precious Metals 255

Become a Futures Trader 257

A Virtual Commodity Investment 260

How to Invest in Commodity ETFs 261

The Outlook for Commodities 263

Conclusion 264

Appendix Internet Resources for ETF Investors 267

ETF Sponsor Web Sites 268

General ETF Web Sites 269

Index Provider Web Sites 270

Current and Historical Market Data Web Sites 271

Fundamental Economic Data Web Sites 272

Index 273