Board Bookshelf: The Complete Guide to ETF Portfolio Management

Second Edition.  By Dr. Scott M. Weiner. 2024. (Available at online booksellers)

Dr. Scott Weiner was the first ETF portfolio manager at Janus Henderson Investors and has also held roles at Deutsche Bank and has been a lecturer at Oxford University where he earned a doctorate in economics.

Directors interested in the basics of how an exchange-traded fund operates from a portfolio management perspective will find this book to be a helpful resource.  The Complete Guide to ETF Portfolio Management is primarily written for portfolio managers of ETFs but the book’s coherent structure, plain language, and easy-to-follow examples can demystify for fund directors how these products work and the intricacies of managing their performance.

The main focus of the book is on passive ETFs, although later chapters discuss actively managed and more novel ETF products. The first three sections cover the basics, including the structure of ETF, the ETF industry, primary market, and explain the roles of participants in the ETF ecosystem.

• Straightforward Examples to Illustrate Concepts: Beyond the basics, directors will appreciate the discussions on how underlying indexes and passive ETFs are constructed and how portfolio managers approach tracking an underlying index. Dr. Weiner illustrates these concepts by creating straightforward examples (for instance constructing a standard index and portfolio composition file) that readers can follow throughout the book.  
  

• The T’s and C’s of ETF Portfolio Management.  Dr. Weiner presents a framework for ETF portfolio management using three T’s (tracking error, taxes, transaction costs) and three C’s (cash, corporate actions, and custom in-kind baskets). The discussion of each of these issues illuminates the responsibilities and challenges faced by the ETF portfolio manager, whose objective is to minimize tracking error, taxes and transaction costs. The biggest challenge for an ETF portfolio manager is managing the three T’s and three C’s effectively and knowing when to prioritize one objective over the other, Dr. Weiner writes.
  

• Managing Tracking Error: For instance, tracking error, or deviations from the underlying index, can occur for a variety of reasons. Dr. Weiner notes that categories of underperformance and overperformance can be straightforward, such as the fees subtracted from fund performance, or more complex, like deviating from prescribed index weights or cash drag (the positive or negative impact of holding cash as opposed to apportioning that cash pro rata over the rest of a portfolio’s holdings).
  

• The 3 C’s: With respect to the three C’s (cash, corporate actions, and custom in-kind baskets), Dr. Weiner notes that the movement of cash into and out of the portfolio is critical to portfolio management. Corporate actions such as dividend reinvestments, M&A and tender offers, can have serious implications for tracking error and taxes. Similarly, custom in-kind baskets can greatly affect the tax efficiency of an ETF.
  

• Advanced topics: Dr. Weiner discusses more advanced topics such as actively managed ETFs and leveraged and inverse ETFs. Directors who oversee these products will find valuable discussions on how portfolio managers approach these products.
  

Overall, this book provides a helpful overview of the ETF ecosystem and valuable insights into ETF portfolio management. The discussions on underlying indexes and how the 3 T’s and 3 C’s impact ETF portfolio management will improve directors’ understanding of how ETFs are managed and likely help directors in their oversight and evaluation of ETFs.

Click here to view an archived video of Dr. Weiner’s webinar covering ETF product development.
Click here to view an archived video of Dr. Weiner’s webinar explaining ETF custom in-kind baskets.