ETF STRATEGIES AND TACTICS This page intentionally left blank ETF STRATEGIES AND TACTICS HEDGE YOUR PORTFOLIO IN A CHANGING MARKET LAURENCE M. HYMAN New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto Copyright © 2008 by Laurence M. Weintraub, and Andrew S. All rights reserved.
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In memory of Joni Rosenberg; To my children David, Danny, Michael, and Emma; And to Jan, my wife, your support and love mean everything. Rosenberg I dedicate this book to the Maggini family of Roviano, Italy. Their for- tuitous courage and generosity helped my father survive a harrowing bail-out from his crippled bomber, as he returned from the famously troubled August 1943 raid on Regensburg. Without their bravery and commitment to humanity, my dad may not have survived the war.
Weintraub This book is dedicated to my lovely wife, Adiel, and my daughter, Julia—for their forbearance during the writing of this book. It is also dedicated to my in-laws, Juana and Candido, And to my parents, Judy and Leonard, For helping take care of Julia (so this book could get finished. This page intentionally left blank For more information about this title, click here CONTENTS Acknowledgments xiii Introduction xix 1. What Are ETFs, and What Makes Them Good Investments? 1 What Is an ETF? 2 Origins of ETFs 2 Growth of the ETF Market 5 Product Varieties 6 Why Investors Are Embracing ETFs 7 2.
ETFs Compared to Mutual Funds 11 The Investment Universe 12 Investment Companies 14 Expenses 26 Tax Efficiency 36 Similarities and Differences between Mutual Funds and ETFs 42 3. How ETFs Work 47 Buying and Selling ETFs: An Illustration 47 ETF Mechanism 49 Arbitrage and ETFs 51 Differences between Unit Investment Trusts and Open-End Companies 52 Grantor Trusts/HOLDRs 54 Actively Managed ETFs in the Future 57 • vii • viii • Contents 4. ETF Regulation 61 ETFs and ETF Look-Alikes 62 Illustration of an ETF Look-Alike 64 Personnel Issues 66 Taxes 69 Regulations outside the United States 72 5. ETF Indexes 77 What Are Indexes? 77 Development of an Index 79 Index Diversity 82 Major Indexes Measured by ETFs 83 Tax Issues 85 6.
The ETF Universe 89 ETF Investment Options 89 Classification by Capitalization 99 Broad Market Index 100 Funds Classified by Market Capitalization of Investments 101 Style 104 International Funds 109 Sector 114 Specialty Funds 122 Commodity 125 Currency 125 Fixed Income 126 7. Support and Resistance with Pivots 129 Pivot Points and ETFs 130 Moving Averages and ETFs 133 What about Swing Trading? 135 8. ETF Money Management 145 Margin-to-Equity Parameter 145 9. Short Selling: Securities and ETFs 153 Short Selling Securities 154 Short Selling ETFs 154 Hedging Your Portfolio 156 Contents • ix 10.
ETF Arbitrage and Spreading 159 Forms of Arbitrage 160 ETF Arbitrage 161 Advantages of Spreading 162 Identifying Arbitrage Opportunities 163 11. Options for ETFs 165 Four Basic Strategies 166 Option Terminology 167 Option Strategies 169 12. Evaluating ETFs 173 Price/Earnings Ratio 173 Price/Sales Ratio 174 Financial Ratios 175 Analyze the Company’s Profitability 176 Getting the Research Done 180 13. ETFs and Market Activity 183 Read the Trends.
and That Includes ETFs 184 Trade in Terms of Probability 187 14. Design, Maintain, and Manipulate Your ETF Portfolio 191 Develop Your “Watch List” of ETFs 191 Export Your Portfolio into Excel 194 Maintain and Manipulate Your Portfolio 197 Two Significant Trading Strategies 199 15. European ETFs 203 Invest in European ETFs 204 ETF Choices 205 ETF Managers—Europe and the United States 205 Taxes 209 Regulation 210 Strategies 211 European Currency ETFs 211 Europe Is Not One Country 212 Eurozone Issues 212 x • Contents 16. ETF Practical Applications 223 Navigating Web Pages 224 Examine Typical ETF Screens 225 Herd Mentality 232 ETF Spreads 233 One-on-One Interviews: Leading ETF Providers 241 American Stock Exchange: The Birthplace of Exchange- Traded Funds 242 Dow Jones 246 iShares Germany 250 Keefe, Bruyette, and Woods (KBW) 256 MSCI BARRA 260 Van Eck Global 265 WisdomTree 268 XShares and HealthShares 275 Appendix A U.
ETFs and Trading Volume as of October 1, 2007 287 Appendix B SPDR Strategies 313 Strategy 1: Building a Customized and Diversified Equity Portfolio That Matches Your Specific Objective 313 Strategy 2: Manage Risk through Asset Allocation by Sector 315 Strategy 3: Rebalance Portfolio Based on Current Sector Weightings 317 Strategy 4: Gain Diversified Access to Attractive Investment Themes 318 Strategy 5: Enhance After-Tax Returns with Tax Swaps 319 Strategy 6: Use ETF Flexibility to Hedge Concentrated Positions 320 Appendix C Web Sites 323 www.com 326 Contents • xi www.com/etf/EtMain.com/etf 333 www.com 337 Endnotes 339 Bibliography 347 Index 351 This page intentionally left blank ACKNOWLEDGMENTS want to acknowledge my father, Buddy, who died too soon while I was I still in school. Dad always encouraged me to be my own person and respect others, no matter who they were or where they stood on the societal ladder. My mother, Lorraine, gave me the support and encour- agement to go into the futures business when almost everyone else told me I was crazy. My thanks to Lee Stern who introduced me to the futures markets and brought me to the Chicago Board of Trade for my first job in the industry.
And the members of the Chicago Mercantile Exchange who elected me to the board and ultimately to chairman. By their action the members of the CME allowed me the privilege of being a part in the development of this great financial institution. To Neal and Andrew, I want to say that it is great working with both of you. And finally my wife, Jan, and my children who encouraged me to do this project.
Rosenberg • xiii • Copyright © 2008 by Laurence M. Weintraub, and Andrew S. Click here for terms of use. xiv • Acknowledgments Two outstanding schools are responsible for any competence or success I have enjoyed as an author who specializes in the discussion, explana- tion, and formation of futures and options trading strategies.
To my undergraduate alma mater, Michigan State University, I owe the critical development of skills in sequential analysis which permit observation of trading strategies as logically interrelated consequences of macroeco- nomic, political, and social trends rather than as isolated serendipitous events. Subsequent graduate study at the Ohio State University, in jour- nalism, forms the bulwark of a statistical analysis skill set which has proven to be invaluable in relating news and events in trading. In the ever-changing world of exchange-traded funds (ETFs), the assistance of Mookesh Patel, who owns Chapter 14, “Design, Maintain, and Manipulate Your ETF Portfolio”; Michael Noonan; Mary Ambrose; and Charles Cottle made this book relevant and “tied to the market.” Thanks also to Barrett Fiske for his market comments. Several fine people stand out among the many good folks I encoun- tered during my years at the Chicago Mercantile Exchange.
Deborah Lenchard hired me as a CME instructor. Cyril Smith, an independent trader, further honed my computer skills in back-testing, and Wayne Church spotted trends a year before the public did. In addition, an author in this discipline can be no better than his or her research sources; fortunately for me I can acknowledge some of the finest. The Globex Center of the Chicago Mercantile Exchange has been a gold mine of statistical information.
In addition, three out- standing local libraries loom large in the composition of this book: the University of Chicago Library, and the public libraries of Evanston and Skokie, Illinois. A special thanks goes to the director of the Skokie Library, Carolyn Anthony. The Everyday Thai Restaurant in the Rogers Park neighborhood of Chicago, Pick a Cup Coffee House in southwest Evanston, and the Acknowledgments • xv Noodle Garden Restaurant also in Evanston must be acknowledged as homes away from home for this harried author, given that they provided safe, quiet havens where I could compose myself and my thoughts. But truly the best trading ideas are hatched out of the egg foo young at Tsing Tao on Green Bay Road in Wilmette.
They taught me a valuable thing about trading: everybody’s a client until they run out of money. A special thanks goes to Jody Rosenbaum. This book would not have been possible without her kindness, patience, and word processing skills. She helped to keep me focused.
And finally, to our editors Dianne Wheeler, Jeanne Glasser, and Jane Palmieri, who kept the troops in line as we marched toward our final objective. Weintraub This book could not have been written without help from many peo- ple. First, I would like to thank Gary Walter, my colleague, who got me involved with this book and the world of ETFs, by referring me to his friend, Neal Weintraub—who was looking for a coauthor.