Exchange-traded funds provide the means for small and large investors to flexibly invest in securities that represent a variety of markets and investment sectors, and they are among the most rapidly growing and diverse investment vehicles in the U.S.
Because ETFs provide intraday liquidity, lower management costs, (frequently) better performance, opportunities for more efficient tax management and generally greater flexibility in portfolio construction and maintenance than mutual funds, many investors have started to use them. However, a certain level of understanding is essential to effective ETF investing, and that's why I wrote
Despite their advantages over mutual funds, investing in ETFs requires in many ways more savvy on the part of investors. There are additional decisions that might be required in their use, as well as additional pitfalls.
Investing with Exchange-Traded Funds Made Easy
gives insight into the varieties, constructions, structures, pitfalls and opportunities that ETFs provide; shows how they differ from mutual funds; explains how investors can benefit from these differences; and describes how ETF traders can construct lower-risk, higher-return portfolios from these instruments.
Successful investing requires the employment of investment strategies that are designed to contain risk as well as to achieve desirable rates of capital growth. Bear markets over the years have produced losses in major market indices such as the
in the order of 45% or more, and losses of more than 75% in more speculative market areas. Such losses are disastrous to many investors.
Investors can contain losses through well-designed portfolio diversification strategies, through the use of tactics that ensure the selection of the best-performing investments at the start of each investment period, through the monitoring of volatility (risk) levels of your holdings, and through familiarization with historical risk/reward relationships of the various market sectors and indices in which you are contemplating investment. This book aims to teach you these skills so you can do the necessary research online, on your own.
It also shows investors how to relate to the trading liquidity of each ETF: which ETFs are easy to trade because there is always a large supply of buyers and sellers (i.e.: highly liquid markets), and which ETFs may incur above-average trading costs for you because their markets are not liquid.
I sought from the start to show how to use ETFs to construct balanced investment portfolios, which you can readily alter to suit either changing market conditions or changing investor lifestyles.
In addition, I wanted to introduce ETFs that represent the credit markets, income-oriented ETFs whose portfolios consist of income instruments, and ETFs that reflect major market indices such as the S&P 500, mid-cap market sectors, small-cap growth and value market sectors, balanced portfolios, and even international markets.
I wrote this book to show do-it-yourself investors how to create diverse and balanced portfolios that you can expect to outperform the average mutual fund with similar investment objectives, at lower risk.
Along with comparisons of the historical performance of various market segments such as the small capitalization arena compared to the large capitalization arena, growth vs. value-oriented securities, and income securities vs. more speculative investment holdings, this book provides specific portfolio strategies and structures that reduce risk while increasing return -- a constant theme throughout
Investing with Exchange-Traded Funds Made Easy
. Furthermore, you will learn when and how to rebalance and alter portfolios to maintain outstanding performance.
Exchange-traded funds can provide definite tax advantages compared to mutual funds. In particular, mutual funds have to pass along taxable capital gain distributions to shareholders because of their own trading and profit-taking. Such distributions create tax bills to mutual fund investors even when those investors do not sell their mutual fund shares.
ETFs overall are more tax-efficient than most regular mutual funds, meaning that long-term investors in ETFs are likely (but not guaranteed) to receive a relatively low level of taxable distributions compared to investors in open-end mutual funds with similar investment objectives.
It was my goal in writing this book that a reader, even one with only enough investment background to place trades in a brokerage account, would learn to apply rational, research-based strategies to the management of his or her investments.
The approach of looking for the best balance between risk and reward, and of keeping your assets only in the most attractive areas of the market, should help set the reader on a course toward long-term financial security.
Marvin Appel is CEO of Appel Asset Management and vice president of Signalert in Great Neck, N.Y., which manages more than $300 million for individual clients. He also edits the highly acclaimed investment newsletter, Systems and Forecasts. He has been featured on CNNfn, CNBC, CBS Marketwatch.com and Forbes.com, and has presented at conferences ranging from the World Series of Exchange Traded Funds to the American Association of Individual Investors.