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The Exchange-Traded Funds Manual, 2nd Edition


Praise for The Exchange-Traded Funds Manual, Second Edition

"When I explore in depth the pros and cons of mutual funds and exchange-traded funds, I go to Gastineau; and when I explore exchange-traded funds in depth, I again go to the definitive source, Gastineau."
John A. Haslem, Mutual Funds Research, Professor Emeritus of Finance, University of Maryland, and Editor of Mutual Funds: Portfolio Structures, Analysis, Management, and Stewardship

"Gary Gastineau has done it again with this new revised version of his Exchange-Traded Funds Manual. If there's anything you need to know about ETFs, it'll be in here. If it's not in here, you don't need to know it. Trust me, I'm a doctor."
Don Chance, PhD, CFA, Flores Chair and Professor of Finance, Louisiana State University

"Gary Gastineau is one the most profound thinkers in the ETF space and also one of its best writers. This book covers both the history and future of ETFs in a way that is highly readable, informative, and even entertaining. Investors will come away from this book with a better understanding of the advantages (and disadvantages) of ETFs and will be better prepared to use them in portfolios."
Matt Hougan, Editor, and ETFR

Gary L. Gastineau is principal of ETF Consultants LLC, which provides specialized exchange-traded fund consulting services to ETF issuers, exchanges, and investors. He is also a managing member and cofounder of Managed ETFs LLC, a firm that has developed new ETF trading systems and new actively managed ETFs. Preceding a position as managing director for ETF product development at Nuveen Investments, Gastineau directed product development at the American Stock Exchange for approximately five years. He is also the author of the first edition of The Exchange-Traded Funds Manual and Someone Will Make Money on Your Funds—Why Not You? (both published by Wiley) and The Options Manual, as well as coauthor of the Dictionary of Financial Risk Management. Gastineau is an honors graduate of Harvard College and Harvard Business School.


CHAPTER 1 An Introduction to Exchange-Traded Funds.

Exchange-Traded Funds Were Introduced as "Something to Trade".

Shareholder Protection.

Tax Efficiency.

Cost Transparency Is Desirable, But Trading Transparency Is Costly.

Intraday ETF Trading.

Comparing ETF and Mutual Fund Economics.


CHAPTER 2 The History and Structure of Exchange-Traded Funds—and Some of Their Competitors.

Some Major Financial Market Developments (1975 to 2000).

Declining Trading Costs Increase Financial Engineering Opportunities, and Financial Engineering Reduces Trading Costs in the New Millennium.

A Brief History of ETFs.

Other Tradable Basket Products.

CHAPTER 3 The Regulatory Framework and Mechanics of the Open-End ETF.

U.S. Fund Regulation Has Played a Major Role in the Structure of ETFs Introduced around the World.

The Investment Company Act of 1940.

Exemptions from the Investment Company Act of 1940 Have Been Granted to Permit Issuance of Open-End ETFs.

ETF Developments Outside North America.

Proposed Rule 33-8901 and Limitations on ETF Trading Transparency.

The Mechanics of ETF Creation and Redemption In-Kind.

CHAPTER 4 Taxation of ETFs and Their Shareholders.

Taxation of Investment Companies: Subchapter M and Regulated Investment Company (RIC) Requirements.

The Mechanics of RIC Shareholder Capital Gains Taxation.

The Wash Sale Rule.

Other Pass-Through Collective Investment Vehicles.

The Relative Tax-Efficiency of Mutual Funds, Exchange-Traded Funds, and Portfolio Baskets.

Deferral of Long-Term Capital Gains.

Outlook for Changes in Investment Company Taxation.

CHAPTER 5 The Economics of Indexing, Trading Transparency, and Limited-Function Active Management of ETFs.

Indexing Works Best When Approached with Common Sense.

The Continuum: From Passive to Active.

Benefits from a Decline in ETF Trading Transparency.

How Trading Plans Become Transparent.

Effect of Transparency Costs on Fund Performance.

Silent (Nontransparent) Indexes.

A Battle of Contrasting Index Fund Management Strategies.

CHAPTER 6 Fund Ratings and Rankings—The Evaluation and Selection of ETFs and Mutual Funds.

An Introduction to Fund Ratings.

Wanted: A Comprehensive But Eclectic Approach to Fund Evaluation and Analysis.

Measuring and Comparing Fund Performance.

A Perspective on the Limitations of Fund Analysis Today.

Elementary Fund Economics.

The Largest Cost for Most Funds Is Not Reported to the Fund’s Investors.

What Is Tracking Error?

Net Tracking Error as a Framework for Fund Performance Evaluation.

Positive (Value-Added) Elements.

eXtensible Business Reporting Language (XBRL): The New Data Standard.

There Is a Wide Range in the Quality of Fund Touts, Tools, and Techniques.

Fund Governance.

CHAPTER 7 How Will Full-Function Actively Managed ETFs Work?

The SEC Concept Release and Limited-Function Actively Managed ETFs.

CHAPTER 8 How to Minimize Your Cost of Trading ETFs.

ETF Trading Is Different from Stock Trading.

ETF Intraday Net Asset Value (NAV) Proxies.

The Brave New World of High-Frequency Electronic Trading.

ETF Trading Volume Is Huge, Growing, and Highly Concentrated.

How to Trade ETFs Efficiently.

Market-on-Close (MOC) Transactions in ETFs.

Introducing NAV–Based Trading in Exchange-Traded Funds.


CHAPTER 9 Economics and Market Effects of ETF Short Selling.

Understanding the Risks of Selling ETFs Short.

The Implications of ETF Short Selling.

ETF Short Selling for Traditional Investors.

CHAPTER 10 Leveraged Long and Inverse Exchange-Traded Funds.

Trading Sardines.

How Leveraged Long and Leveraged Inverse ETFs Construct Their Portfolios.

Is It Useful to Describe Leveraged Fund Returns as Path Dependent?.

Leveraged Fund Return Patterns.

Taxation and Distributions from Leveraged ETFs.

Other Issues Affecting Leveraged ETFs.

Another Way to Obtain Leverage Without Borrowing.

The Bottom Line on Leveraged ETFs.

CHAPTER 11 ETF Applications for Individual Investors and the Advisors Who Serve Them.

Short-Term ETF Trading Sometimes Makes Sense.

ETFs as Portfolios and as Components.

Integrating Diverse Family Accounts.

Tax Management.

Other Tax Issues.

Thinking Outside the Box.

Measuring the Comparative Economics of Trading and Holding Different Components of an Index Arbitrage Complex.

CHAPTER 12 ETFs for Investors Living Outside the United States.

Some Features of the ETFs Described in This Book Are Not Universal.

CHAPTER 13 A Few Things Everyone Should Know about Investment Returns and Retirement.

CHAPTER 14 Where to Look for Help in Using ETFs.

Sources of Professional Help.

The Advisory Relationship.

Sources of ETF Information.



About the Author.