Tuesday, June 19, 2012

Frush, The Strategic ETF Investor

As ETFs proliferate so do books on using ETFs as investing vehicles. Scott Paul Frush, who earlier wrote All About Exchange-Traded Funds, is back with a second volume on the subject—The Strategic ETF Investor: How to Make Money with Exchange-Traded Funds (McGraw-Hill, 2012).

Frush describes the ins and outs of ETFs in some detail—from the creation and redemption process to the known (and not-so-known) costs of ETFs. He outlines some of the nuances of how ETFs are taxed. For those not wanting to go it alone, Frush explains how to vet and work with a financial professional.

The main thrust of the book is how to design a high-performance ETF portfolio. Each investor should devise and tend to his own “perfect” portfolio, which is (for those who could ever be expected to find the mnemonic useful) personalized, economical, reoptimized, filtered, empirical, comprehensive, and timeless. By the way, “timeless” doesn’t mean “eternal” but regime neutral. That is, the portfolio should be optimized to “work in multiple market environments, not just in rising markets.” (p. 107)

The key to investment performance is “al-location, al-location, al-location.” Frush drives home the importance of asset allocation with an analogy to hockey. “Employing asset allocation is like a hockey player choosing to wear protective equipment: helmet, shoulder pads, hip pads, kneepads, and so on. If the hockey player were to take off his protective equipment, he could probably skate faster, cut easier, and pass the puck better. As a result, he could become a dominant player. But it doesn’t take a rocket scientist to recognize that by not wearing the proper hockey protective equipment, he is being very unwise and foolish. One hit into the boards from an opponent and he could be out of the game for a very long time, if not forever. No more domination.” (p. 131)

Frush offers some simple model ETF portfolios. First, three asset allocation models using (almost) the same ETFs but weighting them differently according to the portfolio’s risk level. Although the author believes that “for the most part, the asset allocation models should be sufficient for investors” (p. 204), he also describes some more focused ETF portfolios.

The book concludes with a list of ETF resources, a risk profile questionnaire, and an ETF glossary.

The Strategic ETF Investor is a thorough, competent guide to using ETFs in the “perfect” portfolio. The retail investor who is relatively new to the world of ETFs and asset allocation will learn a great deal from it.

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