The ETF Book

Exchange-traded funds (ETFs) are revolutionizing the investment industry. From their introduction in 1993, ETFs have expanded exponentially over the past fifteen years. You, as an informed investor, need to know what makes ETFs unique, how they work, and which funds may help you achieve your financial goals. The updated edition provides the most current look at the ETF market, where the number of funds has doubled since the book first published in December 2007. A huge number of bonds funds, commodities funds, currency funds, leverage and short funds have been introduced. In addition, actively managed ETFs are here now, and some major mutual fund companies, like Fidelity and PIMCO, are getting into the market. Remarkably, the terminology in the ETP marketplace is also evolving at a rapid pace. The acronym ETP for exchange-traded product has become an industry standard. The term did not exist two years ago.

Written by veteran financial professional and experienced author Richard Ferri, The ETF Book, Updated Edition gives you a broad and deep understanding of this important investment vehicle and provides you with the tools needed to successfully integrate exchange-traded funds into any portfolio.

This detailed, yet clearly articulated guide contains the most up-to-date information on navigating the growing number of ETFs available in today's marketplace. Divided into four comprehensive parts, this guide addresses everything from ETF basics and in-depth fund analysis to the tax benefits of using ETFs. Included are a variety of portfolio management strategies using ETFs and examples of different model portfolios that you can easily adapt to your own investment endeavors.

Whether you're just getting started or are a seasoned ETF investor, The ETF Book, Updated Edition will help enhance your understanding of this evolving field by:

• Examining the fundamental differences between exchange-traded portfolios
• Highlighting how to effectively implement a wide selection of ETFs?from
• Exploring specific ETF strategies?from buy and hold to market timing and sector rotation
• Introducing Index Strategy Boxes?a new way to understand index construction and how a fund is investing your money
• And much more

Each chapter of The ETF Book, Updated Edition offers concise coverage of various issues. It is filled with in-depth insights on different types of ETFs and practical advice on how to select and manage them. The appendixes are an added benefit, offering an ETF Resource List, which will point you to more places for information on these structures, and a detailed Glossary to help you with industry-specific definitions.

The ETF Book, Updated Edition is an invaluable road map for developing a winning investment strategy. Armed with the knowledge found throughout these pages, you'll be prepared to build a solid portfolio of ETFs that will benefit you for years to come.

Foreword ix

Acknowledgments xiii

Introduction xv

PART I ETF BASICS

Chapter 1 ETFs from Evolution to Revolution 3

Chapter 2 The Nuts and Bolts of ETFs 23

Chapter 3 Types of Exchange-Traded Portfolios 41

Chapter 4 ETF Benefits and Drawbacks 57

Chapter 5 Actively Managed ETFs 73

PART II INDEXES THAT ETFs FOLLOW

Chapter 6 Benchmark Indexes and Strategy Indexes 81

Chapter 7 Index Strategy Boxes 93

Chapter 8 Index Security Selection 107

Chapter 9 Index Security Weighting 127

PART III ETF STYLES AND CHOICES

Chapter 10 Broad U.S. Equity and Style ETFs 149

Chapter 11 Global Equity ETFs 171

Chapter 12 Industry Sector ETFs 189

Chapter 13 Special Equity ETFs 209

Chapter 14 Fixed Income ETFs 231

Chapter 15 Commodity and Currency ETFs 247

PART IV PORTFOLIO MANAGEMENT USING ETFs

Chapter 16 Portfolio Management Strategies 269

Chapter 17 Passive ETF Portfolios 277

Chapter 18 Life Cycle Investing 293

Chapter 19 Active Portfolio Management with ETFs 307

Chapter 20 Special Portfolio Strategies 325

Chapter 21 Operational Tips for ETF Investors 335

Appendix A Index Strategy Box Abbreviation Guide 347

Appendix B ETF Resource List 349

Glossary 353

Index 367

About the Author 376

Richard A. Ferri, CFA, is the founder and CEO of the investment firm Portfolio Solutions, LLC. An author of four previous books on low-cost investing, Ferri earned a bachelor of science degree in business administration from the University of Rhode Island and a master of science degree in finance from Walsh College. He worked at two major Wall Street firms for ten years before starting Portfolio Solutions in 1999. The company manages $1 billion in separate accounts using ETFs and index funds. Clients include individuals, nonprofit organizations, and corporate pension plans.

When the original edition of The ETF Book was first published in 2007, it immediately became the source for cutting-edge information on many exchange-traded products (ETPs)—mainly exchange-trade funds (ETFs). The book has still not been surpassed, but with the marketplace for ETPs quickly evolving, now is the perfect time for the Updated Edition of The ETF Book.

This detailed, yet clearly articulated guide—written by veteran financial professional and experienced author Richard Ferri—contains the most up-to-date information on navigating the growing number of ETPs available in today's market. Divided into four comprehensive parts, this revised resource introduces you to everything from successful structures such as bond funds, commodities funds, and currency funds to concepts such as actively managed ETFs that have recently become a reality. Along the way, you'll gain valuable insight into how you can effectively integrate ETFs into any portfolio.

Becoming an informed investor means that you need to know what makes ETFs unique, how they work, and which funds may help you achieve your financial goals. Whether you're just getting started or are a seasoned investor, the Updated Edition of The ETF Book will help enhance your understanding of this dynamic field by:

• Detailing the different types of ETPs, including ETFs, exchange-traded notes (ETNs), grantor trusts, and unit investment trusts (UITs)

• Exploring the latest ETF strategies—from buy, hold, and rebalance to market timing and sector rotation

• Highlighting how to implement a wide selection of ETPs—from equity and fixed income to commodities and leveraged funds

• Examining the fundamental differences between index-based ETPs

• Introducing Index Strategy Boxes—a proven way to understand index construction that is the basis for how most ETPs are invested

• And much more

As an added benefit, this book's appendixes offers an ETF Resource List—which will point you to other sources that discuss these structures—and a detailed Glossary to help you with industry-specific definitions.

The Updated Edition of The ETF Book has everything you need to develop a winning investment strategy. Each chapter is filled with new insights on different types of ETFs and practical advice on how to select and manage them. Reflecting the most recent changes in this field, the Updated Edition of The ETF Book will prepare you to build a solid portfolio of ETFs that will benefit you for years to come.

The Etf Book

All You Need to Know About Exchange-Traded Funds

Richard A. Ferri, CFA

Foreword by

Don Phillips, Managing Director, Morningstar

Praise for the previous edition of

The Etf Book

"In The ETF Book, Rick covers the nuts and bolts of ETFs, the nuances of index creation, and even strategies for putting a financial plan based on ETFs into place. He even goes so far as to suggest an innovative new means of classifying and thinking about these new vehicles. In short, he's done the heavy lifting and the background research that investors need to go forth knowledgeably into this exciting new world."
—From the Foreword by Don Phillips, Managing Director, Morningstar

"Though less than fifteen years since the S&P 500 SPDR introduced the first ETF, ETFs now come in an ever-growing range of asset classes and market segments based on a wide variety of stock selection and weighting approaches. Rick Ferri's book, combined with his ETF classification system, is a first-rate guide to these important investment tools."
—David M. Blitzer, PhD, Managing Director and Chairman of the Index Committee, Standard & Poor's

"Choosing from among the burgeoning selection of ETFs is like trying to drink from a fire hose. Luckily for investors, there's Rick Ferri and The ETF Book—an essential guide to choosing the right investments as well as how to build a solid portfolio. For years, I have highly recommended Rick's books to my readers and have kept my own well-worn copies close at hand. The ETF Book will join my small pile of frequently referenced books next to my computer."
—Robert Brokamp, Editor, The Motley Fool's Rule Your Retirement service

"Rick Ferri has put together a gem of a book on ETFs—and that is remarkable, because he was shooting at a moving target. It's hard to imagine a more thoughtful—and useful —overview of the exchange-traded product market. He's got it all here: what they are, how they're different, what they can do, and best of all, how to use them."
—Jim Wiandt, Editor, Journal of Indexes, and Publisher of ETFR and IndexUniverse.com

"The ETF Book is a complete guide to understanding exchange-traded funds—the investment vehicle of choice for an increasing number of investors and advisors. Written in Rick's informative, easy-to-read style, this book is filled with practical strategies and advice designed to help investors build smarter, stronger portfolios using ETFs."
—Anthony Rochte, Senior Managing Director, State Street Global Advisors