The Exchange-Traded Funds Manual, Second Edition

CHAPTER 5

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

The first edition of The Exchange-Traded Funds Manual⁷⁷ devoted a lot of attention to indexing and the selection of indexes. It stressed the importance of avoiding overly popular indexes and described how to look for an index fund manager who tried to beat rather than just match a benchmark index. There was also extensive discussion of the offerings available from ETF issuers at the time of its publication and where readers could go for updated information. Index topics are also covered in this edition, but the emphasis has changed to reflect changes in the ETF marketplace. The scope of continuing ETF innovation and the availability of improved information on the Internet are both so extensive that individual investors and advisors can get most of the fund specific information they need from electronic sources that make regular updates. However, the Internet is not necessarily the best place to find information that is digested and organized to help investors and advisors make appropriate analyses and reach financially rewarding decisions. One key objective of this edition is to provide more of that digestion and organization.

This chapter and the next two chapters contain some of the most important information in the book. They share a focus on making an appropriate analysis and evaluation of an ETF’s investment attractiveness based largely on the characteristics of its template ...