List of Figures xi

List of Tables xii

List of Boxes xiv

Acknowledgements xvi

Preface xviii

1 Active versus Passive Investing 1 Introduction 1 Implementing an Asset Allocation: A Passive or

Active Approach? 1

The Efficient Market Theory 2

Expanding the Scope of Indexing 12

Measure of Bond Performance 15

Summary 19

2 Security Market Indexes 21

Introduction 21 Factors Underlying the Demand for Security

Market Indexes 21

Main Differentiating Characteristics of Market Indexes 23

Other Stock Indexes 30

Bond Indexes 35

Summary 38

3 Exchange-Traded Funds versus Mutual Funds - Weighting the Options 40

Introduction 40

Structure of ETFs 40

Trading ETFs 43

Impact of New Factors on the Liquidity of ETFs 48

Lower Management Fees 50

ETFs Drawbacks 55

Summary 57

4 Tax Advantages of Exchange-Traded Funds 58

Introduction 58

The Rebalancing Process 58

Taxable Gain at the Inception of Investment 60

Redemption in Stock or in Cash 61

Tax Efficiency of Redemption 62

Tax Consequences on ETF Shareholders 66

Summary 69

5 Tax Savings of ETFs over Mutual Funds: A Case Study 70 Inroduction 70 Actual Tax Savings: Methodology 70 Tax Efficiency, but... 80 Other Considerations Underlying this Tax Advantage 83 iShares on Benchmark S&P 500 85 Summary 90

6 Evolution and Outlook of Equity ETFs 91 Introduction 91 History of Equity ETFs 91 Exchange-Traded Funds by Asset Category 96 ETF Outlook 108 Sources of Information 116 Summary 120

7 Fixed-Income ETFs 121 Introduction 121 Circumstances Surrounding the Launch of Fixed-Income ETFs 122 Current Product Universe 126 ETF Advisors' Fixed Income Trust Receipts or FITRs 133 General Features and Benefits 135 Out of the Gate 137 Summary 141

8 Exchange-Traded Funds and the Wash-Sale Rule:

New Twists on an Old Plot 143

Introduction 143

Investors have become More Tax-aware 144

Tax-Loss Offset Strategies based on Securities Swaps 146 Tax-Loss Offset Strategies as they Apply to Investment

Products other than ETFs 147

Tax-loss Offset Strategies as They Apply to ETFs 149 Could Stocks and ETFs Possibly Constitute "Substantially

Identical Securities"? 158

Summary 159

9 Anatomy of the ETF Landscape in Europe:

General Market Conditions 161

Introduction 161

Common Features but... 162

Anatomy of Europe's ETF Market 166

Asset Allocation 173

Actively Managed ETFs 176

Summary 179

10 ETFs for Europe and Other Market Exposures 181 Introduction 181 Traditional Methods of Investing in Foreign Securities 181 Global Asset Allocation with MSCI's iShares 186 International ETFs Tracking Indexes Other than MSCI's 194 International ETFs Trading in Foreign Markets 198 Concerns and Other Points of Interest 214 Summary 225

11 The Advent of ETFs in Imperfect Markets: Case of

Mainland China 227

Introduction 227

Brief Overview of China's Markets 228

Index Review 233

China's ETFs 237

Are China's ETFs an Idea Whose time has Come? 242

Summary 246

12 Long-Short Investment Strategies using ETFs 248 Introduction 248 Essentials of Short Selling 249 Short Selling with ETFs 251

Practical Strategies 259

Global Perspectives of Short Selling 264

Summary 269

13 Other ETF Investment Strategies and Applications 270

Introduction 270

Futures Contracts 270

Futures Contracts on ETFs 273

Futures on European ETFs 277

Margin Trading with ETFs 282

Summary 288

14 Investment Strategies using Options on ETFs 290 Introduction 290 Basic Features of Option Contracts 290 Options on ETFs 293 Investment Strategies using ETF Options 299 Other Options Strategies 304 Summary 310


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