Exchange-Traded Funds For Dummies

Want to expand your portfolio beyond stocks and mutual funds? (Of course you do, you smart investor you.) Then take a look at exchange-traded funds (ETFs)! A cross between an index fund and a stock, they're transparent, easy to trade, and tax-efficient. They're also enticing because they consist of a bundle of assets (such as an index, sector, or commodity), so diversifying your portfolio is easy. You might have even seen them offered in your 401(k) or 529 college plan.

Exchange-Traded Funds For Dummies is your primer on ETFs. It gives you an insider (the legal kind!) perspective on the investment process, starting with an overview of ETFs and how they differ from stocks and mutual funds. The book also helps you measure risk and add on to your portfolio, and offers advice on how to avoid the mistakes even professionals sometimes make. Throughout, you'll also find plenty of tips, tricks, and even sample portfolios to set you up on the right path for investment success.

With Exchange-Traded Funds For Dummies, you will:

• Find out exactly what exchange-traded funds are and why they make good investments
• Mix and match stock portfolios to diversify yours
• Go beyond stocks for maximum diversification: bonds, real estate, and commodity ETFs
• Maintain your portfolio for future growth

With the tricks of the trade in Exchange-Traded Funds For Dummies, you can easily apply the knowledge you gain to turn good investments into great ones. Happy earning!

Russell Wild, MBA, is the author or coauthor of nearly two dozen books, including Index Investing For Dummies and Bond Investing For Dummies. He has a master’s degree in business administration and a graduate certificate in personal financial planning. Wild is also an associate of NAPFA.

Introduction 1

Since the First Edition 1

Out of the shadows 2

Filling* the investment voids 2

Creations of dubious value 2

Morphing into new creatures 3

About This Book 3

Foolish Assumptions 5

Icons Used in This Book 5

Beyond the Book 6

Where to Go from Here 6

Part 1: The ABCs of ETFs 7

Chapter 1: No Longer the New Kid on the Block 9

In the Beginning 10

Enter the traders 10

Moving south of the border 10

Fulfilling a Dream 11

Goodbye, ridiculously high mutual fund fees 11

Hello, building blocks for a better portfolio 12

Will you miss the court papers? 12

Not Quite as Popular as the Beatles, But Getting There 12

Moving from Wall Street to Main Street 14

Keeping up with the Vanguards 15

Ready for Prime Time 16

The proof of the pudding 17

The major players 18

Twist and shout: Commercialization is tainting a good thing 19

Chapter 2: What the Heck Is an ETF, Anyway? 23

The Nature of the Beast 24

Choosing between the Classic and the New Indexes 25

Preferring ETFs over Individual Stocks 26

Distinguishing ETFs from Mutual Funds 27

Why the Big Boys Prefer ETFs 28

Trading in large lots 28

Savoring the versatility 28

Why Individual Investors Are Learning to Love ETFs 30

The cost advantage: How low can you go? 30

Uncle Sam’s loss, your gain 33

What you see is what you get 36

Getting the Professional Edge 37

Consider a few impressive numbers 38

You can do what they do! 38

Passive versus Active Investing: Your Choice 39

The index advantage 39

The allure of active management 40

Why the race is getting harder to measure and what to do about it 41

Do ETFs Belong in Your Life? 42

Calculating commissions 42

Moving money in a flash 42

Understanding tracking error 43

Making a sometimes tricky choice 43

Chapter 3: Getting to Know the Players 47

Creating an Account for Your ETFs 48

Answering a zillion questions 48

Placing an order to buy 50

But wait just a moment! 51

Trading ETFs like a pro 51

Introducing the Shops 52

What to look for 52

Price is no longer key 53

The Vanguard Group 54

Fidelity Investments 55

Charles Schwab 55

E*Trade 56

Other brokerage houses 56

Presenting the Suppliers 57

It’s okay to mix and match — with caution 57

Check your passport 58

BlackRock Financial Management iShares 58

Vanguard ETFs 59

State Street Global Adviser’s SPDRs 60

Invesco 61

Charles Schwab 63

First Trust 63

Other suppliers 64

Familiarizing Yourself with the Indexers 64

S&P Dow Jones Indices 64

MSCI 65

FTSE/Russell 65

CRSP 65

Bloomberg 66

Meeting the Middlemen 66

NYSE Arca 67

NASDAQ 67

BATS 67

Meeting the* Wannabe Middlemen 67

Commissioned brokers 67

Separately managed accounts 68

Annuities and life insurance products 68

Funds of funds 68

Part 2: Building the Stock (Equity) Side of Your Portfolio 69

Chapter 4: Risk Control, Diversification, and Some Other Things You Need to Know 71

Risk Is Not Just a Board Game 72

The trade-off of all trade-offs (safety versus return) 72

So just how risky are ETFs? 73

Smart Risk, Foolish Risk 74

How Risk Is Measured 76

Standard deviation: The king of all risk measurement tools 76

Beta: Assessing price swings in relation to the market 78

The Sharpe, Treynor, and Sortino ratios: Measures of what you get for your risk 78

Meet Modern Portfolio Theory 81

Tasting the extreme positivity of negative correlation 81

Settling for limited correlation 82

Reaching for the elusive Efficient Frontier 84

Accusations that MPT is dead are greatly exaggerated 84

Mixing and Matching Your Stock ETFs 86

Filling in your style box 86

Buying by industry sector 87

Don’t slice and dice your portfolio to death 88

Chapter 5: Large Growth: Muscular Money Makers 91

Style Review 93

What makes large cap large? 93

How does growth differ from value? 93

Putting these terms to use 94

Big and Brawny 95

Contrary to all appearances 95

Let history serve as only a rough guide 96

ETF Options Galore 97

Winnowing the field 97

Strictly large growth, best options 98

ETFs I wouldn’t go out of my way to own 100

Chapter 6: Large Value: Counterintuitive Cash Cows 103

Six Ways to Recognize Value 105

Looking for the Best Value Buys 106

Taking the index route 106

Making an ETF selection 107

Chapter 7: Small Growth: Sweet Sounding Start-ups 113

Getting Real about Small-Cap Investments 115

Your Choices for Small Growth 116

Strictly small-cap growth funds 116

Smaller than Small: Meet the Micro Caps 118

Chapter 8: Small Value: Diminutive Dazzlers 123

It’s Been Quite a Ride 125

Latching on for fun and profit 125

But keeping your balance 125

What About the Mid Caps? 128

Chapter 9: Going Global: ETFs without Borders 129

The Ups and Downs of Different Markets around the World 130

Low correlation is the name of the game 131

Reme*mber what happened to Japan 133

Finding Your Best Mix of Domestic and International 133

Why putting three-quarters of your portfolio in foreign stocks is too much 133

Why putting one-quarter of your portfolio in foreign stocks is insufficient 135

Why ETFs are a great tool for international investing 136

Not All Foreign Nations — or Stocks — Are Created Equal 137

Choosing the Best International ETFs for Your Portfolio 139

A number of brands to choose from 140

All the world’s your apple: ETFs that cover the planet 140

Developed-market ETFs: From the North Sea to the Land of the Rising Sun 141

Emerging-market stock ETFs — Well, we hope that they’re emerging 144

Adding value to your international portfolio 147

Small-cap international: Yes, you want it 148

Chapter 10: Sector Investing: ETFs According to Industry 151

Selecting Stocks by Sector, not Style 152

Speculating on the Next Hot Industry 154

Sizzling and sinking 154

Momentum riders and bottom feeders 154

Doing Sector Investing Right 155

Calculating your optimal sector mix 155

Seeking risk adjustment with high- and low-volatility sectors 156

Knowing where the style grid comes through 157

Combining strategies to optimize your portfolio 157

Seeking low correlations for added diversification 158

Sector Choices by the Dozen 159

Vanguard ETFs 159

Select Sector SPDRs: State Street Global Advisors (Part 1) 160

SPDRs: State Street Global Advisors (Part 2) 161

BlackRock’s iShares 163

Invesco 164

Fidelity* 166

Chapter 11: Real Estate Investment Trusts: Becoming a Virtual Landlord 169

Considering Five Distinguishing Characteristics of REITs 170

Limited correlation to the broad markets 171

Unusually high dividends 171

Different taxation of dividends 172

Special status among financial pros 172

Connection to tangible property 172

Calculating a Proper REIT Allocation 173

Judging from the past 173

Splitting the baby: Domestic and international REIT funds 174

Picking REIT ETFs for Your Portfolio 175

U.S domestic REIT ETFs 175

International and Global REIT funds 177

Chapter 12: Dividend Funds: The Search for Steady Money 179

Your High-Dividend ETF Options 180

Promise of Riches or Smoke and Mirrors?         181

Part 3: Adding Bonds (Fixed Income) to Your Portfolio 185

Chapter 13: For Your Interest: The World of Bond ETFs 187

Bond Investing in the Modern Era 188

Tracing the Track Record of Bonds 188

Portfolio protection when you need it most 189

History may or may not repeat 191

Tapping into Bonds in Various Ways 193

Finding strength in numbers 194

Considering bond investment costs 195

Determining the Optimal Fixed-Income Allocation 195

60/40? 50/50? Finding a split that makes sense 196

Meet Joe, age 67, with $840,000 in the bank 198*

Meet Betsy and Mike, age 36, with $30,000 in the bank 199

Chapter 14: Your Basic Bonds: Treasuries, Agency Bonds, and Corporates 201

Tapping the Treasuries: Uncle Sam’s IOUs 203

Schwab Short-Term U.S Treasury ETF (SCHO) 204

Vanguard Short-Term Treasury ETF (VGSH) 204

Vanguard Intermediate-Term Treasury Index

ETF (VGIT)/Schwab Intermediate-Term U.S Treasury (SCHR) 205

Schwab Long-Term U.S Treasury ETF SCHQ)/Vanguard Long-Term Treasury ETF (VGLT) 206

Bread at $15 a Loaf? Getting Inflation Protection in a Flash 207

Schwab U.S TIPS ETF (SCHP) 207

Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIP) 208

Treasuries’ Cousins: U.S Agency Bonds (Mortgage-Backed Securities) 209

Banking on Business: Corporate-Bond ETFs 210

Vanguard Intermediate-Term Corporate Bond E*TF (VCIT) 212

Vanguard ESG U.S Corporate Bond ETF (VCEB) 212

Vanguard Short-Term Corporate Bond Index (VCSH) 213

The Whole Shebang: Investing in the entire U.S

Bond Market 214

NY Mellon Core Bond ETF (BKAG) 215

Vanguard Total Bond Market (BND) 215

Vanguard Short-Term Bond (BSV) 216

Chapter 15: Moving Beyond Basics into Municipal and Foreign Bonds 219

Municipals for Mostly Tax-free Income 219

Take a tour of 50 states 220

Foreign Bonds for Fixed-Income Diversification 222

Vanguard Total International Bond (BNDX) 223

iShares International Treasury Bond ETF (IGOV) 223

SPDR FTSE International Government Inflation-Protected Bond ETF (WIP) 224

Invesco International Corporate Bond ETF (PICB) 225

Emerging-Market Bonds: High Risk, High Return 226

Vanguard Emerging Markets Government Bond (VWOB) 227

SPDR Bloomberg Barclays Emerging Markets USD Bond ETF (EMHC) 227

iShares J.P Morgan USD Emerging Markets Bond Fund (EMB) 228

Part 4: Specialized ETFs 231

Chapter 16: All That Glitters: Gold, Silver, and Other Commodities 233

Gold, Gold, Gold! 234

Midas touch or fool’s gold? 235

A vastly improved way to buy the precious metal 236

The tax man cometh 237

Silver: The Second Metal 237

Quick silver on the move 238

If you must 238

Oil and Gas: Truly Volatile Commodities 239

Oily business 239

No experience necessary 240

The sad saga of contango 241

Taxing your tax advisor 242

(Somewhat) Safer Commodity Plays 242

General commodity index funds 242

Actively managed, or quasi-actively managed, commodity funds 244

Awaiting new developments 245

Playing the Commodity Market Indirectly 246

Tapping into commodity companies 246

Tapping into commodity-rich countries 248

Chapter 17: Investing for a Better World 249

What Are “Sustainable Investing” and “ESG”? 250

Sustainable investing is sometimes filled with ambiguity 250

Are companies with better ESG ratings more profitable? 251

Is ESG investing creating a better world? 251

Will investing in ESG funds make you rich? 252

Fence-sitters, make a decision 253

Which Sustainable ETFs Are Best for Your Portfolio? 254

Engine No 1 Transform 500 ETF (VOTE) 256

Xtrackers (Deutsche Bank) S&P SmallCap 600 ESG ETF (SMLE) 256

Nuveen ESG International Developed Markets Equity (NUDM) and Nuveen ESG Emerging Markets Equity (NUEM) 257

Humankind U.S Stock ETF (HKND) 257

VanEck Vectors Green Bond (GRNB) 259

KraneShares Global Carbon ETF 259

Chapter 18: Going Active with ETFs 261

Not Exactly Setting the World on Fire 262

Do You Want to Get Active? 263

Let’s Get Practical 264

A Look at Some of the Most Popular Actively Managed ETFs 265

ARK Innovation ETF (ARKK) 265

JPMorgan Ultra-Short Income ETF (JPST) 266

PIMCO Enhanced Short Maturity Active ETF (MINT) 266

Quadratic Interest Rate Volatility and Inflation Hedge

ETF (IVOL) 266

First Trust Long/Short Equity ETF (FTLS) 267

KraneShares Global Carbon ETF (KRBN) 267

Time to Swap Out Your Active Mutual Funds? 268

Chapter 19: All-In-One ETFs: For the Ultimate

Lazy Portfolio 271

Buying into the World’s Stock Markets in a Flash 272

Vanguard Total World Stock ETF (VT) 273

SPDR Portfolio MSCI Global Stock Market ETF (SPGM) 273

Putting the World’s Bond Markets at Your Fingertips 273

Vanguard Total World Bond ETF (BNDW) 274

iShares Global Green Bond ETF (BGRN) 274

Buying Stocks and Bonds in One Shot 275

iShares asset allocation funds 275

State Street Global Advisors SPDRs: Three asset allocation options 277

Invesco’s actively managed “target-risk” ETFs 278

Multi-asset funds that change as you age 279

Russell’s average review for the average reader on an average day 279

Chapter 20: Proceed-with-Caution ETFs 281

Funds That (Supposedly) Thrive When the Market Takes a Dive 281

Entering an upside-down world 282

Boasting a track record like none other 283

Funds That Double the Thrill of Investing (for Better or Worse) 284

Crazy math: Comparing leveraged funds to traditional ETFs 284

The continuing sad saga of DIG and DUG 285

“Buffer” or “Defined-Outcome” ETFs 286

Alphabet Soup: MLPs, SPACs, and IPOs 287

Investing in one-horse towns 289

Get Rich (or Not) in Crypto- or Other Currencies! 290

Take a Whiff of These Cannabis ETFs 291

Copycat ETFs 292

Part 5: Putting it all Together 295

Chapter 21: Sample ETF Portfolio Menus 297

So, How Much Risk Can You Handle and Still Sleep at Night? 298

A few things that just don’t matter 299

The irony of risk and return 300

The 25x rule 300

Other risk/return considerations 302

The limitations of risk questionnaires 302

Keys to Optimal Investing 304

Incorporating Modern Portfolio Theory into your

investment decisions 304

Minimizing your costs 304

Striving for tax efficiency 305

Timing your investments (just a touch) 305

Finding the Perfect Portfolio Fit 306

Considering the simplest of the simple 306

Racing toward riches: A portfolio that may require a crash helmet 307

Sticking to the middle of the road 309

Taking the safer road: Less oomph, less swing 312

Chapter 22: Exercising Patience: The Key to

Any Investment Success 317

The Tale of the Average Investor (A Tragicomedy in One Act) 320

Returns that fall way short of the indexes 320

ETFs can make failure even easier! 321

The lure of quick riches 322

The Value Line Paradox 323

Paper versus practice 324

The lesson to be learned 324

“Investment Pornography” Everywhere 324

Welcome to the wild, wacky world of investment advice 325

YouTube: Where teenagers in baseball caps explain the “secrets” of ETF trading 326

Patience Pays, Literally 327

Talk about unpredictability 327

A short history of the market’s resiliency 329

Chapter 23: Exceptions to the Rule (Ain’t There Always) 333

Rebalancing to Keep Your Portfolio Fit 334

How rebalancing works 335

How often to rebalance 337

Rebalancing for retirees 337

Contemplating Tactical Asset Allocation 337

Understanding the all-important P/E ratio 338

Applying the ratio to your portfolio 339

Buying unloved assets 340

Harvesting Tax Losses, and the IRS’s Oh-So-Tricky “Wash Rule” 340

What the heck is “substantially identical” anyway? 341

Revamping Your Portfolio with Life Changes: Marriage, Divorce, and Babies 341

Betsy and Mark: A fairly typical couple 342

One year later 343

Yet one year later 344

Are Options an Option for You? 344

Understanding puts and calls 346

Using options to make gains without risk 346

Insuring yourself against big, bad bears 347

Seeming almost too good to be true 347

Weighing options strategies against the diversified ETF portfolio 348

Factoring in time and hassle 349

Chapter 24: Using ETFs to Fund Your Fun (Retirement) Years 351

Aiming for Economic Self-Sufficiency 352

Taking the basic steps 353

Choosing the right vessels 353

Curing the 401(k) Blues 358

Lobbying the benefits manager 359

The Roth 401(k) 360

Strategies for the Self-Employed 361

The traditional IRA versus the Roth IRA 361

Taxes now or taxes later? 362

Ushering Your Portfolio into Retirement Readiness 362

15+ years and counting 363

Less than 15 years to retirement 363

Withdrawing Funds to Replace Your Paycheck 364

Don’t obsess over maintaining principal or drawing from dividends 364

Take your minimum required distributions 366

IRA, 401(k), or regular (taxable) brokerage account: Which to tap first? 366

Chapter 25: Marrying ETFs and Non-ETFs to Make an Optimal Portfolio 369

Tinkering with an Existing Stock or Mutual Fund Portfolio 370

Improving your diversification 370

Minimizing your investment costs 371

Using ETFs to tax harvest 372

Looking Beyond the Well-Rounded ETF Portfolio 372

Adding mutual funds: The most popular of all investment vehicles 373

Adding I Bonds: An Uncle Sam bond with a twist 375

Do Consider Annuities, Preferably Fixed 375

Part 6: The Part of Tens 379

Chapter 26: Ten FAQs about ETFs 381

Are ETFs Appropriate for Individual Investors? 381

Are ETFs Risky? 382

Do I Need a Financial Professional to Set Up and Monitor an ETF Portfolio? 382

How Much Money Do I Need to Invest in ETFs? 383

With Hundreds of ETFs to Choose From, Where Do I Start? 383

Where Is the Best Place for Me to Buy ETFs?       384

Is There an Especially Good or Bad Time to Buy ETFs? 385

Do ETFs Have Any Disadvantages? 385

Does It Matter Which Exchange My ETF Is Traded On? 386

Which ETFs Are Best in My IRA, and Which Are Best in My Taxable Account? 386

Chapter 27: Ten Mistakes Most Investors

(Even Smart Ones) Make 387

Paying Too Much for an Investment 387

Failing to Properly Diversify 388

Taking on Inappropriate Risks 388

Selling Out When the Going Gets Tough 388

Paying Too Much Attention to Recent Performance 389

Not Saving Enough for Retirement 389

Having Unrealistic Expectations of Market Returns 390

Discounting the Damaging Effect of Inflation 390

Not Following the IRS’s Rules 391

Failing to Incorporate Investments into a Broader Financial Plan 391

Chapter 28: Ten Forecasts about the Future of ETFs and Personal Investing 393

ETF Assets Will Continue to Grow for Better or Worse 394

More Players May Enter the Field, but Only a Few 394

Investors Will Get Suckered into Buying Packaged Products 395

ETF Investors Will Have No Need for Anything but ETFs 395

The Markets Will (Unfortunately) See Greater Correlation than in the Past 396

Asset Class Returns Will Revert toward Their Historic Means 396

Taxes Will Rise 397

Inflation Will Remain Tame 397

Private Pensions (of Sorts) May Emerge from the Rubble 398

Hype Will Prevail! 398

Part 7: Appendixes 401

Appendix A: Great Web Resources to Help You

Invest in ETFs 403

Independent, ETF-Specific Websites 403

Websites of ETF Providers 404

The seven biggies 404

Some of the lesser players 405

Financial Supermarkets 406

Stock Exchanges 406

Specialty Websites 406

Regulatory Agencies 407

The People Who Create the Indexes 407

Good Places to Go for General Financial News,

Advice, and Education 408

Yours Truly 408

Appendix B: Glossary 409

Index 415

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