There’s no topic in personal finance today that’s hotter than exchange-traded funds (ETFs). Diehard believers in passive investing love the low costs and broad diversification available through ETFs. Traders and market timers love the ability to buy and sell on an intra-day basis, and they cherish the growing number of highly specialized offerings that allow them to execute far more sophisticated strategies than ever before. Even active managers are getting in on the scene, using ETFs to “equitize” their cash positions and imagining a future where actively managed ETFs will be widely available. Never before have so many investors embraced a financial concept so rapidly and for such a wide variety of reasons as they have with exchange-traded funds.

The ETF phenomenon is perhaps most revolutionary from the individual investor’s perspective. For years, there was a gulf between what was possible for institutional investors and what the little guy could do. Like many small investors, I recall reading about the global wanderings of legendary investor Jim Rogers, author of Investment Biker and other significant investment books. Rogers would observe global events and turn them into investment ideas, often shorting certain currencies, going long various commodities, and making bets on specific subsectors of a market, such as Japanese small companies. I was dazzled by his insight but was frustrated by my own inability to act upon such insights even if I could be as clever as Rogers ...

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