Three Paths to Profitable Investing: Using ETFs in Healthcare, Infrastructure, and the Environment to Grow Your Assets

Jeffrey Feldman and Andrew Hyman

Vice President, Publisher: Tim Moore
Associate Publisher and Director of Marketing: Amy Neidlinger
Executive Editor: Jeanne Glasser
Editorial Assistant: Myesha Graham
Development Editor: Russ Hall
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Cover Designer: Alan Clements
Managing Editor: Kristy Hart
Project Editor: Betsy Harris
Copy Editor: Geneil Breeze
Proofreader: Kathy Ruiz
Indexer: Lisa Stumpf
Compositor: Nonie Ratcliff
Manufacturing Buyer: Dan Uhrig

© 2010 by Jeffrey Feldman and Andrew Hyman
Published by Pearson Education, Inc.
Publishing as FT Press
Upper Saddle River, New Jersey 07458

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Printed in the United States of America

First Printing May 2010

ISBN-10: 0-13-705426-2

ISBN-13: 978-0-13-705426-8

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Library of Congress Cataloging-in-Publication Data

Feldman, Jeffrey Lee, 1947-
 Three paths to profitable investing : using ETFs in healthcare, infrastructure, and the environment
to grow your assets / Jeffrey Feldman, Andrew Hyman. — 1st ed.
  p. cm.
 ISBN 978-0-13-705426-8 (hardcover : alk. paper) 1. Investments. 2. Medical care—Finance. 3.
Infrastructure (Economics)—Finance. 4. Business enterprises—Environmental aspects. I. Hyman,
Andrew
S. II. Title.
 HG4521.F36 2010
 332.63'27—dc22
                                       2010004799

Dedication

For Naomi, Mia, Maxine, and Jonny

—Jeff

To Julia and Adiel

—Andrew

Acknowledgments

There are hundreds of people I have met during my four decades on Wall Street who have taught and counseled me in more ways than I can count. It would be impossible to recognize all of them. For the past seven years, I have been privileged to be a participant in the Exchange Traded Fund (ETF) revolution that has taken place in the market. ETFs have amassed $1 trillion in assets as of March 2010, up from barely $100 billion just seven years ago. ETFs will be a critical capital market tool from now on, and I wish to thank those who helped put me in a front row seat.

Tony Dudzinski, who cofounded XShares with me, was the first person to teach me about ETFs and to this day I have not met anyone more knowledgeable than him. Sam Katz, my first partner in the business, helped me to formulate many of the concepts presented in this book. Bill Kridel, my great friend, has helped me to understand the changing face of medicine and biology. I am indebted to my colleagues at XShares: David Jaffin, Jim McCluskey and Rich Berenger for their unconditional support. Mike Rosella, who runs the fund practice at Paul Hastings, has not only been a great lawyer and advisor, he is a wonderful friend.

Jeanne Glasser, our editor at Pearson, has guided us expertly and comfortably through the creation of this book. I am deeply indebted to Jeanne for allowing me to become an author at this stage in my career. Betsy Harris has edited expertly, and we are grateful to all the folks at Pearson who participated in this venture.

I have been witness to many things in my 40 years in the business and I have drawn on that experience to write this book. For almost all those years, I have had the good fortune to have a true friend and business partner with me every step of the way. I want to thank Joe Schocken; it wouldn’t have been fun without him.

Andrew Hyman, my coauthor, suggested we write this book and I am grateful he did. I certainly could not have completed this task on my own and Andrew, an experienced author, has deftly shown me the ropes. I look forward to collaborating with him again.

My wife Judy has spent as much time organizing, editing, and proofing this book as I have cowriting it. This is nothing new as she has been organizing, editing, and proofing my life for more than 40 years. And fortunately for me, she still has a lot of work to do.

—Jeff Feldman

This book could not have been written without the help of many people, although the authors remain responsible for the text. My thanks go to all these people; I have tried to list them all.

Professor Baruch Lev, Philip Bardes Professor of Accounting and Finance at the Leonard Stern School of Business at New York University, discussed the finances of biotech companies with me. His articles on biotech finance, available from his website, http://pages.stern.nyu.edu/~blev/, are most enlightening.

Professor David Dranove, Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg School of Management, helped me understand key economic issues around the healthcare debate. His book, Code Red: An Economist Explains How to Revive the Healthcare System without Destroying It (Princeton University Press, 2008) is a must-read for anyone trying to understand the healthcare system and how the U.S. healthcare system evolved.

Burton Weisbrod, John Evans Professor of Economics at Northwestern University, spoke with me about healthcare economics. His article, “The healthcare quadrilemma: an essay on technological change, insurance, quality of care, and cost containment” (J Econ Lit 1991, 29:523-552) helped guide our discussion of the relationship between medical technology and costs. His article also needs to be read by those seeking to understand the relationship between how medicine is practiced and costs.

Joshua Bilenker M.D., of Aisling Capital, spent a great deal of time with me giving an overview of happenings in the biotech industry from the point of view of venture capitalists and a medical practitioner. I am grateful for his time and interest in our work.

In the field of green, I was fortunate to spend time with Richard Cook and Bob Fox, of Cook + Fox Architects LLP, the designers of the Bank of America tower in New York City, considered the greenest office building in the United States. They showed me how green and business go together and that sustainability in the environment can also create the profits that sustain businesses. They walk the talk in the offices—applying green principles in the workplace and creating a workplace that enlightens. Thanks to Jared Gilbert of Cook + Fox for arranging this most enlightening meeting.

Jon Levey, Chief Lending Officer, and Steve Sherman, Chief Operating Officer of GreenChoice Bank, a green-focused bank in Chicago, explained the nexus between green and banking and the role of the financial sector in fostering a green economy.

Bruce M. Hannon, Jubilee Professor of the Liberal Arts and Sciences at the University of Illinois at Urbana-Champaign, has always influenced my thinking on environmental matters—and how many projects that have bad environmental credentials also have bad business and economics behind them.

John Sodergreen, founder and Editor-in-Chief of Scudder Publishing (www.scudderpublishing.com) and Publisher of the Energy Metro Desk has been a help in the writing of this book, and all my other books, as he is always clued in on what is happening in the energy business and happy to share that information. Energy Metro Desk is a must-read for those who want to stay on top of what is happening in energy and green markets.

Richard Asplund has provided me with great insight into the whole ETF business and green investing. He knows the ins and outs of index and fund creation at the highest level. I was grateful for all that I learned from him. Anyone who wants to understand how to invest in green energy needs to read his book, Profiting from Clean Energy (Wiley, 2008).

Bill Wolff, Julia Rabinowitz, and Bernard Groveman of First Manhattan graciously arranged a meeting with Richard Asplund and XShares to discuss the future of environmental investing, which helped me better understand how leading investors approach the issues related to green investing.

Dan Gary, a very good friend, has provided a reliable sounding board while writing this book for dealing with many of the big picture issues and understanding health insurance’s place in our society and the relationship between healthcare and employment.

George Nassos, the Director of the Center for Sustainable Enterprise at the Stuart School of Business, provided useful feedback on the business of the environment and the importance of sustainability for our economic future. He is tremendously knowledgeable.

Michael Gross, an attorney with the Authors Guild, helped us greatly with our contract negotiations. Any author who is about to sign a book contract needs to join the Authors Guild. At $90, it’s a bargain because one of their publishing attorneys will review your contract and provide you with suggestions on how to improve it as part of your membership. This is great for authors without agents.

Robert Hyman, my brother, an MIT-trained engineer, guided me to the sources to understand infrastructure issues.

Thank you also to Daniel Elbaum, Jonathan Levine, Andrew Lowdon, Ted Netzky, Eero Pikat, Tina Rothstein, Emily Soloff, and Julie Vanderlip for all their help.

Michael Hyman pointed me in the direction of drugs such as Gleevec and how they are changing medicine, for which I am grateful.

A number of people reviewed the final manuscript and offered valuable comments that we did our best to incorporate into the manuscript. They helped make the book more coherent and more cohesive. These individuals include Mark Faasse, M.D., of the UIC College of Medicine, Paul Goodman of the Kingfisher Group and Allied District Properties, R. Kymn Harp of Robbins, Salomon, and Patt, Ltd., and Howard Singer. Thanks to Dan Hyman of Millennium Properties for referring me to Mr. Harp and to Craig Niederberger, M.D., for referring me to Dr. Faasse.

Also, thanks to Larry Rosenberg and Neal Weintraub, with whom I wrote ETF Strategies and Tactics (McGraw-Hill, 2008). Without them, I would not have met our editor, Jeanne Glasser, then at McGraw-Hill—and had the chance to write this book.

My thanks go to our fabulous team at Pearson that made this happen. First, thanks to our editor, Jeanne Glasser, who immediately recognized the vision Jeff had for the investment world and committed her company’s resources to bring it to the public. Jeanne gave us time and attention, and we are grateful for her willingness to work with us to make this book happen. Although I haven’t met him, Barry Ritholtz, of “The Big Picture” blog (www.ritholtz.com/blog) alerted me that Jeanne had moved to Pearson when we were looking for a publisher, and I gather I was the second author to call her up. Thank you, Barry. In addition, Geneil Breeze, our copy editor, and Betsy Harris, our project editor, have done a fabulous job of taking our material and editing it to make the manuscript flow and read well.

Without my coauthor, Jeff Feldman, this book would never have happened. He had the vision behind this book and the experience on Wall Street to know we need to change the way things work to empower investors. In addition, he sees the importance of investing in what matters in our lives. It has been great working with him and his wife, Judy, on this book.

My father, Leonard Hyman, read and commented on all the chapters, which has been a great help, given his extensive knowledge of utilities and other infrastructure businesses as well as the green aspects of those businesses. As the author of America’s Electric Utilties (Public Utilities Reports, 2005), which has gone through eight editions, as well as numerous other books on utilities and privatization, he provided greatly beneficial viewpoints and knowledge.

I am grateful for the forbearance of my wife and daughter in the process of writing this book, especially during the final weeks, which fell during school winter vacation, as writing a book takes time away from family life. Still, my daughter must have absorbed something because she started producing her own illustrated books—and produced them faster than this one.

—Andrew S. Hyman

About the Authors

Jeffrey Feldman is the Founder and Chief Executive Officer of XShares, a Registered Investment Advisor that specializes in the creation of Exchange Traded Funds. He is the cocreator of the TDX Independence Target Date ETFs which are operated in partnership with Amerivest, a subsidiary of TD Ameritrade. He serves as the Chairman of the Board of those funds.

Jeff has been on Wall Street for 40 years starting his career as a research analyst and then founded his own brokerage firm. In addition, he has taught economics as an adjunct instructor at several community colleges in New Jersey over the past 35 years.

Andrew Hyman is Vice President of Private Sector Advisors, Inc., a private consulting and investing company. He is coauthor of ETF Strategies and Tactics: Hedge Your Portfolio in a Changing Market and Energy Risk Management: A Primer for the Utility Industry, as well as other books on the utility industry.