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Investing with Exchange-Traded Funds Made Easy: A Start to Finish Plan to Reduce Costs and Achieve Higher Returns, 2nd Edition

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Investing with Exchange-Traded Funds Made Easy: A Start to Finish Plan to Reduce Costs and Achieve Higher Returns, 2nd Edition

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  • Copyright 2009
  • Edition: 2nd
  • eBook (Watermarked)
  • ISBN-10: 0-13-700370-6
  • ISBN-13: 978-0-13-700370-9

This is the eBook version of the printed book. If the print book includes a CD-ROM, this content is not included within the eBook version.

“Possessing a rare skill set amongst professional investors and authors, Dr. Appel has successfully managed to provide readers with the perfect mix of up-to-date details on the various types and asset classes of ETFs, crucial, tried, and true concepts of risk management, and just the right mix of backing historical data to pull it all together–all in a “user-friendly” package. Upon conclusion of this book, readers will have experienced a paradigm shift in the thought process of their own current investment strategies. Taking it to the next level and actually implementing the concepts will automatically cause readers to experience a higher level of profitability and consistency; one they might never have thought possible from the utilization of concepts in just one small book.”

—Deron Wagner, Founder and Portfolio Manager, MorpheusTrading.com, author, Trading ETFs: Gaining An Edge With Technical Analysis

“Today, exchange-traded funds are the most innovative and rapidly growing investment vehicles. Marvin Appel’s new book provides, in a highly readable framework, a wealth of information on what they are and–more importantly–how private and professional investors can use them to build wealth through a simple and easy-to-implement investment program”

—C. Michael Carty, Principal and Chief Investment Officer, New Millennium Advisors, LLC

“In the ever-expanding complex world of ETFs, Marvin Appel has cut through all the fluff and created a one-stop guide to not only using them, but using them profitably. The sections on diversification and the use of relative strength in comparing asset classes are invaluable. Individual investors and financial advisors alike will get a significant return on investment by spending time with this book”

–Bob Kargenian, CMT, President/Principal, TABR Capital Management, LLC

ETFs offer exceptionally low expenses, outstanding performance, and unparalleled transparency. With more than 200 new ETFs added in just the last year, for typical investors, the choices are simply overwhelming. In this fully updated guidebook, renowned ETF expert Dr. Marvin Appel cuts through the ETF marketing hype, offering a start-to-finish plan for choosing the right ETFs–today, and for years to come.

Appel reveals what ETFs can and can’t do, explains why they’re not all equally attractive, and shows exactly how to use them to beat the market. Drawing on objective data and proven, backtested strategies, Appel shows how to quickly move into the right ETFs at the right time, consistently staying on the winning side of major market trends.

Appel starts by explaining how ETFs work, then illuminates every facet of ETF investing: quantifying risk and reward; increasing investment income; deciding when to move into cash; and much more. This book includes new chapters on commodity ETFs, using ETFs for investment income and all new coverage of emerging market ETFs. Appel also provides a clear assessment of tax-oriented ETF investing. From start to finish, this book candidly assesses risks, costs, and rewards–helping you become an informed ETF consumer, and an exceptionally effective ETF investor.

  • Discover what today’s newest ETFs can do for you
    Get the real deal on commodity ETFs, emerging market ETFs, and more
  • Use ETFs to invest like the big players
    Drive down costs, and fully leverage diversification, Wall Street’s only “free lunch”
  • Learn what your investment advisors still won’t tell you
    The objective truth about today’s ETF’s: changing costs, risks, and opportunities
  • Build and maintain your “one-decision” portfolio–the easy way!
    Profitable investing has never been this simple
  • Derive even greater profits with proven “active” strategies
    Simple allocation strategies you can implement in just minutes

Sample Content

Table of Contents

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

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


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