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With Exchange Traded Fund (ETF) sponsors constantly making new types of ETFs available, there is now a variety of ETFs that provide investors with an opportunity to develop diversified investment portfolios. Their sophistication has also grown to include a breed of ETFs that do not passively track the performance of an underlying index. With this assortment of newer ETFs, and more on the way, market strategists are now capable of devising all-ETF portfolios based on a multitude of asset allocation schemes that respond to the need of their clients.

This book provides a comprehensive overview of the changes brought about by ETFs. It describes and analyses recent changes alongside their impact on investment portfolios, and discusses the continuing success of index-based ETFs and the reasons underlying their long-lasting achievements. The book offers an objective discourse on the newly minted smart beta ETFs and some of the issues surrounding them, and provides an overview of how the increasingly widespread ETF-based portfolio hedging strategies are constructed and implemented.

Paying particular attention to the importance of asset allocation and the essential role it plays in portfolio construction, this book explores the role played by ETFs in changing investors’ attitudes toward home bias, covering both established and emerging frontier markets. The author leverages his extensive background to integrate best professional practices and academic rigor for an increased understanding of the ever-evolving world of ETFs.



1. Evolution and Outlook of the ETF Market: From a Trickle to a Mighty Roar

The quite laborious beginning of what many consider to be the first exchange-traded fund (ETF) belies the strong growth and market acceptance that ETFs have enjoyed for the past 15 years or so. After that first ETF finally took off in the late 1990s, it shepherded the rise of a new concept in indexing that is enjoying remarkable success to this day. ETFs have finally become a mainstream investment tool both for individual and for institutional investors.
A. Seddik Meziani

2. Characteristics of Exchange-Traded Funds: Weighting Myths and Realities

Mutual funds still dominate the index-fund industry, but exchange-traded products have been catching up to them very quickly. With more than 1,600 products and over $2 trillion in net assets under management, they are now considered by investors as a practical alternative to mutual funds. Exchange-traded funds (ETFs) and exchange-traded notes (ETNs) are the two most common varieties of exchange-traded products. This book’s emphasis is on the former.
A. Seddik Meziani

3. Exploring the Tax Advantages of Exchange-Traded Funds

Exchange-traded funds (ETFs) were created not only to offer the same diversification and convenience presented by mutual funds, but also to alleviate the tax burden on investors. This chapter examines why mutual funds present a disadvantage relative to ETFs, by reviewing the relevant tax laws and how ETFs operate to produce the significant tax savings reported by their sponsors.
A. Seddik Meziani

4. Understanding the Complex Universe and Role of Fixed-Income Funds as Investment Vehicles

The bond market has come a long way since 1970, when prices were fairly stable and the types of bonds were quite limited. So dull was the bond market prior to 1970, that many investors still remember when they were told that bond exposure should be proportional to one’s age. If you were lucky enough to have lived to the ripe age of 80, then, according to this old adage, you should have 80% of your investments in bonds. Likewise, this rule of thumb limits your exposure to bonds to 20% if you are only 20 years of age.
A. Seddik Meziani

5. Jumping on the Bond ETF Wagon

The debut of fixed-income exchange-traded funds (ETFs) in 2002–2003 was anxiously anticipated by investors, who regard bonds as an essential part of a diversified portfolio. After a slow start that lasted a few years, bond ETFs suddenly started being issued in droves. Even the deep 2008–2009 financial crisis, which had quite an impact on their equity counterparts, didn’t slow down their relentless growth.
A. Seddik Meziani

6. Smart-Beta ETFs: Market Growth and Performance Trends

A new category of exchange-traded funds (ETFs), arguably referred to as smart-beta ETFs, has lately issued a meaningful challenge to traditional ETFs. Although they seem new, a review of the relevant academic literature shows that most of the ideas behind these innovative products come from this scholarly work.
A. Seddik Meziani

7. Managing Volatility Risk with Minimum-Volatility ETFs

A new category of exchange-traded funds (ETFs), known as low-volatility ETFs, aims to use a combination of techniques to reduce risk in a portfolio while, at the same time, delivering levels of return comparable to the market. Launched in 2011, they have been touted as cleverly managed volatility strategies.
A. Seddik Meziani

8. Finding Value in Environmental, Social, and Governance ETFs

This chapter explores whether investing with environmental, social, and governance (ESG) issues in mind has turned into a compelling investment premise for fund managers. They have traditionally chosen from a variety of investing styles to establish the specific parameters of their portfolios. These styles range from company size, value, and growth for stock funds to maturities and credit qualities for fixed-income funds. But lately, concerns brought forward by increased awareness of ESG issues have gradually pervaded all traditional categories of style investing. By increasingly influencing overall decision-making regardless of style, these issues have turned into a compelling investment premise for these managers.
A. Seddik Meziani

9. Sailing Away with Emerging Markets ETFs

Buoyed by favorable demographics and rising domestic consumption, emerging markets have long beckoned investors seeking long-term investment opportunities. But more recently, three fundamental shifts have simultaneously hit emerging market equities: the Federal Reserve’s tapering of its bond-buying program, disappointing corporate earnings, and concerns over the economic slowdown in China, a country that accounts for around one-third of emerging markets’ gross domestic product (GDP) and about 10% of global GDP. Faced with these daunting challenges, investors have responded with a massive pullback from these developing economies, first in 2013 and again, more recently, throughout August 2015. The scale and frequency of the selling pressure have been substantial enough to make them the subject of many alarming stories filled with warnings of potentially magnified risks and severe liquidity problems for those who remain invested in them. Some startling media headlines proclaim no less than the death of emerging markets.
A. Seddik Meziani

10. The Frontier Markets Story: Adapting to a New Landscape

In search for performance and diversification, bold investors ready to go where few investors have gone before have begun spicing up their portfolios with an exotic asset category increasingly identified as “frontier markets.” Many factors have led them gradually to consider strategic allocations to these areas, not the least of which is the fact that emerging economies have become more correlated with developed economies. Also, articles in several trade publications and the business press speak of these markets as having gone beyond diversification benefits. According to these sources, frontier markets, having been less volatile than either the developed or emerging markets, provide investors with excellent risk-adjusted performance.
A. Seddik Meziani

11. Active ETFs: To Be or Not to Be?

Investors anxiously anticipated the debut of actively managed exchange-traded funds (ETFs) in 2008, expecting them to succeed as well as their counterparts in the mutual fund industry. In the end, the reality didn’t match the expectations, as actively managed funds are still languishing in the basement of the ETF industry. The first goal of this chapter is to identify the factors responsible for this state of affairs, particularly an issue around transparency that remains the focus of contention between the Securities and Exchange Commission (SEC) and fund sponsors pursuing approval of new active ETFs.
A. Seddik Meziani

12. Building Fresh Tax-Advantaged Investment Strategies with ETFs

Chapter 3 reviewed the mechanics underlying the tax advantage of passively managed equity exchange-traded funds (ETFs), noting that this benefit derives from their unique creation and redemption process. This process gives them a clear advantage over mutual funds, which must sell securities to meet redemptions, paid in cash to departing investors, and therefore trigger large capital gains distributions that are passed through to the remaining investors. ETF holders are sheltered from this risk, because the fund has no need to sell any of the shares comprising the underlying portfolio, due to the in-kind redemption clause.
A. Seddik Meziani

13. The Long and Short of ETFs

An investment strategy is as good as its ability to take advantage of unusually profitable opportunities or simply reduce exposure to risk. Hence, selecting the right instrument is critical in determining how much success an investor will have with his or her chosen investment strategy. It could be rendered inept by the confines of the instruments being employed to implement it, such as the lack of continuous pricing, the trading restriction of the uptick rule, or any other restrictions that would limit the range of customized investment approaches in which they can be used.
A. Seddik Meziani

14. Other ETF Investment Strategies and Applications

This chapter highlights three exchange-traded fund (ETF) trading strategies: one based on futures, where an individual enters a contract to buy or sell ETFs at a specified price and delivery date; another on margin trading, in exchange for making a small payment known as the “initial margin;” and the third on what’s commonly known as “barbelling,” an investment strategy best described as a balancing act between investments deemed safe and those considered a greater risk.
A. Seddik Meziani

15. Investment Strategies Using Options on ETFs

Several factors have made the quarter ending September 2015 the worst quarter since 2011 for equity markets. These include concerns about economic slowdowns in China and elsewhere around the globe, a severe decrease in commodity prices that’s pulling the currencies of many emerging and frontier markets to record lows against the U.S. dollar, and worries about valuations considered high by historical standards. As exchange-traded funds (ETFs) have grown in popularity and several of them have become optionable, they have positioned themselves as another fast and cost-efficient way of controlling portfolio risk in markets that are not only trending down, but also frequently shaken by large price swings across most asset classes.
A. Seddik Meziani


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