ETFs based on intelligent indexing

A more recent obsession of mine are Electronically-Traded Funds, or ETFs. I'm particularly interested in the rapid evolution they are undergoing, from recreations of relatively static indexes like the S&P 500 or the Russell 1000 to more sophisticated, creatively constructed indexes.

A good example is the Claymore/Sabrient Insider ETF, or NFO, which tracks an index of companies experience a heavy volume of insider buying, taking the famous Peter Lynch quote to heart:

"Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise"

Sabrient, an independent analyst firm in California, has a number of interesting indexes that form the basis for their collaboration with Claymore, but NFO does seem to be the most interesting, as this Smartmoney article concurs. Backtesting shows almost 18% gains over the past ten years, but that and $5 will buy you a Starbucks grande chili-frapp-ca-ching-weeno or whatever passes for coffee these days.

More interesting is this comparison of NFO against the S&P for the past year, which shows it basically doubling its performance and clocking in a healthy 22% or so. Not that past performance is any indicator of future triumphs. I'm also intrigued by Claymore sector cyclical ETF, but I haven't looked into it deeply enough to make a determination.

This kind of simple tweak to narrow a broader index makes intuitive sense to me. All the data is out there - all the SEC filings, all the econometric indicators - why not correlate selected indicators to cherry pick the stocks that have a better chance of outperforming the herd? Seems more like the Web 2.0 way to invest, to me.

Disclaimer: I own NFO and I'm besides I have very little idea what I'm talking about, generally.

Lively books about dull subjects, first installment: Against the Gods

Recently I realized that my favorite type of book is the type that allows me to learn about something I know is important and interesting but that I am prejudiced against as dull. I thought I'd share my impressions of these remarkable books on my blog, hoping that others can similarly expand their horizons without becoming stodgy tweed-wearing professors in the process.

Expecting a book about statistics to be on the deadly end of the dull spectrum, Peter L. Bernstein's Against the Gods sat on my "to read, someday" shelf for quite some time. When I finally did get around to it, though, I found it thoroughly enjoyable. Tracing the history of risk management may not sound scintillating, but in fact the themes it explores are deeply embedded in the very nature of our modern world.

Once I understood the basic premise - that quantifying risk allowed man to step out from the idea that his life was predetermined by the will of the gods - I had a hard time putting it down. Math and statistics have seldom been rendered so approachable. Instead of getting bogged down in equations or detailed explanation, Mr. Bernstein makes the very wise decision to trace the evolution of the concepts behind the science rather than the science itself. The result is a highly readable, deeply profound piece of work that will mess with your frame of reference.