by Richard A. Ferri, CFA
Reviewed by Gary W. Silverman, CFP®
Gary Silverman owns a fee-only financial planning firm in Wichita Falls, Texas. He is the editor of the financial newsletter Personal Money Planning, writes the newspaper columns Your Money and Biz2Biz, and hosts the cable talk show, Money Cent$. Contact him at www.personalmoneyplanning.com.
"Hot", "revolutionary," "game-changing" ... these are the types of superlatives used to describe the phenomenon that has overtaken the investing world in the form of the exchange-traded fund (ETF).
Passive and active investors, tacticians and strategists, broad-based and sector players, professionals, institutions, and individuals all have embraced ETFs for part of or even a majority of their investing needs. Yet I find that many who have embraced them have little, if any, knowledge of what ETFs are, insight into how they work, or an understanding of how to integrate them into their portfolios.
The ETF Book was written by Richard Ferri, CFA, to cure these problems.
The book is divided into four parts:
ETF Basics answers the question, "What are they anyway?" This section delves into the structure and internal workings of ETFs starting with how they originated and have evolved. Ferri next looks at the different kinds of exchange-traded products (think ETF versus ETN) and how they are better or worse than open-ended mutual funds. The end of the section briefly discusses the rise of actively managed ETFs.
Indexes That ETFs Follow discusses how indexes are constructed and maintained. Ferri introduces a "new" way to look at classifying ETFs using ... drum roll please ... a tic-tac-toe box. These "Index Strategy Boxes" are then discussed in relation to security selection and security weighing.
ETF Styles and Choices divides the ETF world into U.S. stocks, international stocks, bonds, and alternative asset classes. Ferri then shares examples of ETF strategies for each category.
Portfolio Management Using ETFs has Ferri looking at a number of ways to use ETFs, including passive asset allocation strategies, market timing, sector rotation, hedging, and balancing a portfolio around an illiquid position.
Much of the book deals with indexes and their underlying asset classes and thus is not specific to ETFs. This would likely be a review to anyone with a background in investment management and portfolio construction. Therefore, this book is best suited to someone who is not only in the learning phase on ETFs, but is also new to asset classes, indexes, and portfolio design strategy.
There are many books that teach investing based around open-ended mutual funds. The ETF Book is the first I've read that teaches investing based on exchange-traded funds, and I think it does a fine job of that, while providing a comprehensive overview of the world of ETFs.