Andrew Allentuck

Monday, October 8, 2001

How to be an Index Investor
by Max Isaacman
McGraw-Hill Ryerson, 2000
259 pages
ISBN 0-07-135683-5

The problems with investing in standard mutual funds are many: they have high fees compared to index funds, they are often tax inefficient for they penalize late comers in the year and by and hold investors with huge distributions that in and out traders can avoid. Most of all, the styles of managed funds don't work well over time, for regression to the mean cuts the returns of top performers in one period and turns the previous winners into losers. Isaacman explains it all with insight and clarity.

He gets granular explaining the makeup of domestic U.S. index funds and detailing weighting problems in national market WEBs. Add in a fine index and a good list of useful websites. Apart from a recommendation to avoid Canadian index funds (too heavily resource weighted, he says), there is little Canadian content. But it's not a major loss since his information on U.S. and international indexes is valid for Canadian index funds too.

Mr. Isaacman, a stock broker, explains how major index funds like Dow Jones Diamonds, Standard & Poor's SPDRS, the midcap SPDRs, the NASDAQ 100 QQQs, national market index WEBS and select sector SPDRs work. He shows why managed funds often do too much trading, producing higher costs than in a buy and hold index fund that never flips a stock unless there is a major change in its industry or a bankruptcy. He notes that these adjustments tend to me made just once a year, especially on the NASDAQ QQQ which are the top 100 firms on that market. He adds that with index shares, one can short on a downtick (a move downward in the market price), something one cannot do with an ordinary stock.

This is the best book we've yet seen on investing in the huge range of exchange traded funds. All serious investors should have a look at How to be an Index Investor.