From the March 01, 2012 issue of Futures Magazine • Subscribe!

The Ultimate Guide to Trading ETFs

Book review

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

In this detailed and well-written book, the authors’ experience and expertise are clearly evident, and it provides a thorough review of the basics of exchange-traded funds (ETFs). The authors explain the nuances, risks and differences among ETFs and provide information on exchange-traded notes (ETNs).

The book begins with an explanation of how ETFs are constructed, the different types and asset classes and the importance of tracking the underlying portfolio. Additionally, it also covers more exotic ETFs such as international commodities and currencies.

The authors believe that ETFs are well-suited for investors with varying risk tolerance levels, are actively involved in making investment decisions and do the work to select, track and make changes to their portfolio.

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

One useful appendix provides six sample portfolios for different types of investors containing 4 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 for ETF and ETN investors to help them avoid unexpected taxes.

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 and indicates the appropriateness (riskiness) for investors. The usefulness of most of this information is limited because it already was outdated at publication time. However, the ETF listing provides readers with a good look at all those 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, presenting a general overview on 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 or 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.

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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