“Possessing a rare skill set amongst professional investors and authors, Dr. Appel has successfully managed to provide readers with the perfect mix of up-to-date details on the various types and asset classes of ETFs, crucial, tried, and true concepts of risk management, and just the right mix of backing historical data to pull it all together–all in a “user-friendly” package. Upon conclusion of this book, readers will have experienced a paradigm shift in the thought process of…
Buy Investing with Exchange-Traded Funds Made Easy: A Start-to-Finish Plan to Reduce Costs and Achieve Higher Returns at Amazon
The growth of Exchange Traded Funds (ETFs) to more than 300 valued at over $350 billion with another 300 in registration, coupled with exploding investor interest in these funds, has resulted in a handful of books being published on the subject. Dr. Marvin Appel’s new 13- chapter book is the best of the bunch from all perspectives. He is the son of Gerald Appel (the developer of the MACD indicator and his business partner. Gerald has also just penned his newest book titled “Opportunity Investing” which is a perfect complement to Marvin’s book.
The author first explains how ETFs work and how they are different from traditional mutual funds, and then reviews the different types (fixed income; large, small, and madcap growth and value). Appel then provides detailed insight into investment risk and risk-adjusted performance. Diversification is next up, and Appel illustrates the performance of an ETF portfolio consisting of REITs, S&P 500 F and small cap from 1997-2005. Additionally, he delineates a six-step process to produce an optimal ETF portfolio.
Appel provides investors with a very conservative “one-decision” portfolio requiring a minimal time commitment. Performance date from 1981-2005 is presented which illustrates the compound annual return of 10.7%. This ETF portfolio’s composition was 30% US T-bills (cash equivalent), 20% investment grade bonds, 20% S&P 500, 20% REITs and 10% small caps. Interestingly, the only losing years were 1990 (-1.5%) and 2002 (-2.3%). Appel recommends rebalancing after one year and one day to gain favorable long-term capital gains tax treatment.
Additionally, he advocates switching on a yearly basis between the Russell 1000 (large cap) and Russell 2000 (small cap) to take advantage of a stronger trend in place from the prior year for the stronger of the two indices. Using this approach adds 2.2-2.7% a year to the returns which when compounded produces significant incremental returns not attainable by just sticking with one index all the way. To complete the ETF selection process, he shows how to select between growth and value ETFs using a common relative strength approach (dividing one index by the other to see which is stronger) for small, midcap and large cap ETFs.
Finally in chapter 10, Appel adds international ETFs into the mix. He explains the intricacies, risks and costs of investing in this ETF category. Investors should be aware of the high correlation of international and domestic ETFs which sometimes does not add value in a declining market environment. However, there are periods when international ETFs perform better than the S&P 500 for example, and it pays to use relative strength analysis to stay with the outperforming category until the trend reverses.
According to Appel, interest rates play a critical role in stock market performance over time. The key is to determine if rates are rising or falling and whether the U.S. Treasury is borrowing short- or long-term. He explains how the yield curve works and its impact on stock market performance during yield curve inversion. He provides a composite interest rate indicator with specific rules to help investors know when to be invested.
Appel ends the book with a terrific chapter titled “The Ultimate ETF Investment Program” and provides a detailed three-step approach that requires 30 minutes a month to complete. He provides back-tested results of his Ultimate ETF Strategy (UES) from 1979-April 30, 2006 (with and without a bond component) illustrating an annual compounded return of 17.1% for the UES, 15.2% for UES with bonds compared to a 13.4% return for the S&P 500 buy-and-hold benchmark. He also includes a very easy-to-follow flow chart of the decision-making steps to get you to the UES.
In summary, self-directed investors who understand ETFs and want to construct a well-diversified, low-cost, ETF portfolio with a methodology to track the performance and make periodic changes, as necessary, will find Appel’s ETF methodology well worth their time.
Unless I’m missing something (and I doubt I am) the Ultimate ETF Strategy described in this book CLEARLY would have resulted in a miserable failure in 2008. The stock market is currently down roughly 40%, and the REITS index is down over 50% as of this writing. If you had put 25% into a REITs index ETF, 25% into a total bond index find, 25% into either a foreign or domestic stock index ETF, and the other 25% into an investment style ETF (either Large or Small, and either Growth or value) prescribed in this book, you would have lost an incredible amount of your investment in 2008. Likely the only portion that would have been relatively flat would have been the bond ETF, which is 25% of the strategy. I believe you likely also would have lost with this strategy in 2007 too.
NOTE: The Ultimate ETF Strategy has an interest rate indicator which is supposed to be a signal to get out of half the equities which would leave you 25% exposed instead of 50%. I didn’t follow this signal, but I DOUBT this signal would have gotten triggered in 2008, since I believe either an inverted curve or higher yields compared to the previous 6 months was the trigger. TNX Yield has generally gone down for 2008 and the curve wasn’t inverted. Even if triggered, which I doubt was the case, I believe, the investor would still be 25% invested in equities instead of 50%, and you still would be 25% invested in REITS, so 2008 would still have been a horrible year.
One key problem with this book, as alluded to by another reviewer, is that the research data goes back to the early 1980s, and the past 25 years or so have generally been a bullish period for stocks. The basic idea behind this book is that you stay 50% invested in equities most of the time (except when the interest rate trigger makes you get only 25% invested in equities, with the other 25% in cash). Based on trends, you make sure the two stock ETFS you own (or one ETF when the interest rate trigger had gotten you out of the other ETF) have been outperformers relative to other indices (until the performance trend changes). 25% goes into a total bond market index ETF and the other 25% goes into a REITS index ETF. (the latter got CRUSHED in 2008 even more than equities at the time of this writing)
The premise (whether stated or implied) is that, since this strategy had outperformed the market for, *roughly*, the past 25 years (at time the book was written), and had been a profitable strategy for that time period, then it is likely to be an outperforming and profitable strategy in the future. The problem, as I see it, is that the 25 year period beginning at the time this book was published may be very different in terms of performance compared to the prior 25 years!
I followed this strategy in 2007, except that I didn’t buy a REITs ETF, because it looked to me like a REITs were in a BUBBLE (good decision on my part!), and I bought a Fidelity Short Term Bond fund instead of a Total Bond Index ETF (not-so-great decision on my part). However, I decided to abandon this strategy altogether in December of 2007 and sold ALL my equities by the 1st week of January. (one of the best financial decisions of my life!)
I had abandoned this strategy when I read about the problems in the financial sector, housing sector, and the credit markets. Thankfully, I saved myself a lot of money by NOT following this strategy!
In 2008, I made money trading in and out of the market (including shorting the market), while the world at large lost 40% or more of their money buying and holding stock indices. My opinion is that buying and holding stock indices for the long term is not going to be the ticket to high returns that it was 25 years ago, even if holding the indices that are relative outperformers (such as holding the S&P if it outperforms EFA, or holding a Small Cap growth if it has outperformed large growth, or large cap value).
Frankly, I do NOT recommend anyone follow this strategy, or any other strategy that would leave you exposed to equities throughout a major bear market (in terms of length or in terms of percentage).
Do yourselves a favor, and find a chart of the Japanese Nikkei 225. In 1990, the Nikkei was around 40,000. Now it’s under 9,000 and it is almost 19 years later. Buy and hold would have lost you a fortune! Same thing could be happening in the USA for the next 10 or 20 years.
Don’t be fooled into thinking that stocks can’t have 20 or even 30 year year periods where the returns are lousy relative to simple money market accounts. I would not bet the farm on ANY strategy that would keep you exposed to equities and REITs all the time. The lack of a satisfactory EXIT strategy for equities or REITS is a major flaw in the Ultimate ETF Strategy described in this book.
Sorry, but I can’t recommend this book, unless you are comfortable with the idea of potentially losing a lot of money. Strategies that were successful for the 25 year period before the book was published will not necessarily work well from that point forward.
After having read a few books by other notable authors such as Bernstein, Ferri, Bogel, Gibson and Edleson that describe the virtues of low cost-investing and targeted asset allocation, I found that Appel’s book added new information on the practical use of Exchange Traded Funds. Specifically, their use will permit you to cut internal investment costs significantly relative to mutual funds and even relative to index funds. His writing is technical, but can easily be understood. He does stray into some areas that suggest the use of certain market metrics to determine what investment types will be better and when (market timing and asset class selection). You will need to determine for yourself if his suggested tactics will work for you. Nonetheless, I found his concepts new and interesting and consider myself more informed having read them. In summary, a good addition to your reading materials on the subject.