From the April 01, 2011 issue of Futures Magazine • Subscribe!

The Ultimate Guide to Trading ETFs: How to profit from the hottest sectors in the hottest markets all the time

The Ultimate Guide to Trading ETFs: How to profit from the hottest sectors in the hottest markets all the time
By Don Dion and Carolyn Dion
John Wiley & Sons, Inc., 2010
$34.95; 212 pages

The Dions’ book provides a through review of the basics of exchange traded funds (ETFs). It is very detailed and well-written and the authors’ experience and expertise are clearly evident. The authors explain the nuances, risks and differences among ETFs and provide information on ETNs (Exchange-Traded Notes) as well.

They explain how ETFs are constructed, the importance of tracking the underlying portfolio and the different types and asset classes, including leveraged, nontraditional and commodity. They also cover customized index and dynamic (active) ETFs that use different criteria for selecting the underlying investments such as revenues, value, dividends and earnings. Three excellent chapters are devoted to international, commodities, TIPS and currencies because they have characteristics and nuances that differ from the domestic ETFs.

The authors believe that ETFs are well-suited for investors with varying risk tolerance levels who are actively involved in making their own investment decisions and do the work to select, track, and make changes to their portfolio. In addition, they suggest that investors research the possible choices of ETFs, choose what’s right for themselves, their portfolio, their time horizon and risk tolerance.

In selecting ETFs for a portfolio, the Dions recommend that the investor carefully investigate all the details about any ETF under consideration, including its total assets, average daily trading volume, top 10holdings, expense ratio and how well it tracks its underlying components.

One useful appendix provides six sample portfolios for different types of investors containing four to 12 ETFs with suggested weightings. However, there is no past portfolio performance. This would have been useful for comparison purposes, especially for the 2008 through 2010 period. Another helpful appendix provides guidance on taxes for ETF and ETN investors. Investors need to be cognizant of the tax consequences of the various types of ETFs or they may incur unexpected liabilities.

A 32-page appendix lists all U.S. ETFs and ETNs as of April 30, 2010, indicating their name, ticker symbol, net assets, share volume and ranking. The ranking, based on the authors’ analysis, rates the complexity of each ETF on a scale of 1 of 5 indicating the appropriateness (riskiness) for investors. The usefulness of most of this information is limited because it is already outdated at time of publication. However, the listing of ETFs provides readers with a good look at all these instruments available for consideration.

Although the title implies that trading is a major focus of the book, in actuality only one 16-page chapter is devoted to the subject, and this chapter is a general overview about trading. The authors give practical advice on buying highly liquid ETFs with tight bid-ask spreads, using limit orders and trading between 10:00 a.m. and 11:30 a.m. and 2:30 p.m. and 3:00 p.m. EST. There is no mention of how and when to enter or exit a trade, position sizing, where to place stops or the use of technical analysis. Also, there are no criteria provided on how to select and when to enter and exit hot sectors in all markets.

Overall, for someone interested in learning about the intricacies, composition, types and universe of available ETFs, this book covers the subject matter very well. However, for those self-directed individuals looking for ETF trading guidance, this book falls short.

Leslie N. Masonson is the author of “Buy – DON’T Hold: Investing with ETFs using relative strength to increase returns with less risk” and “All about Market Timing” (Second Edition). Reach him at lesmasonson@yahoo.com.

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