Marvin Appel, M.D., Ph.D.
CEO, Appel Asset Management Corp.
Great Neck, NY www.appelasset.com
516-487-7146

Beating the Market--outline
• Navigating the market: A simple way to optimize risk and reward
• Take the easy way out: The only portfolio you will ever need for long term investing
• Where the money is: Relative strength as a tactical asset allocation tool.
• Conclusion—Some new ETFs that look promising.

A Simple Way to Measure Risk

240
220
200
180
160
140
120
100
80
Growth of $100
3/10/99-3/10/2000
Nasdaq 100 Tracking Stock (QQQQ)
First Eagle Global (SGENX)

200
150
100
50
0
400
350
300
250
Growth of $100
3/10/99-2/27/2007
Nasdaq 100 Tracking
Stock (QQQQ)
First Eagle Global
(SGENX)

120
115
110
105
100
11722 on Jan. 14, 2000
95
90
85
Dow Jones
Industrial Average
80
75
70 x100
1999 2000
7286 on Oct. 9, 2002
2001 2002
2000-2002
37.8% drawdown
2003 2004
75
2
70 x100
95
90
85
80
120
115
110
105
100

150
140
130
120
110
100
90
80 iShares MSCI Emerging
Market Index Fund (EEM)
April 2003-May 2006
70
60
50
May-June 2006
26% drawdown
October 2005
12% drawdown
March-April 2005
10% drawdown
July-Aug. 2007
18% drawdown
150
140
130
120
110
100
90
80
70
60
50
40 40
2003
April-May 2004
18% drawdown
2004 2005 2006 2007

155
150
145
140
135
130
125
120
115
110
105
100
95
150
100
50
S&P 500 Index and worst drawdowns
(overall gain 14%/year)
8% drawdown iShares MSCI Emerging
Market Index Fund (EEM)
April 2003-May 2006
(overall gain 40%/year)
7% drawdown
5% drawdown
8% drawdown
6% drawdown
Feb.-March 2007
12% drawdown
9% drawdown
155
150
145
140
135
130
125
120
115
110
105
100
95 x10
90
150
100
July-Aug. 2007
18% drawdown
April-May 2004
18% drawdown
March-April 2005
10% drawdown
2004 2005
October 2005
12% drawdown
May-June 2006
26% drawdown
2006 2007
50

Different areas of the stock market

Market capitalization
• Value of all a company’s shares = market capitalization.
• Large-cap = $10 billion and over
• Small-cap = $2 billion and under
• As a general rule, compared to small-caps, largecap stocks have tended to be
– safer
– slightly less profitable
– Better when the U.S. dollar is weaker (large-caps have more of their earnings from sales abroad)

Value versus growth stocks
• Value stocks appear to be good bargains based on the current situation of the company.
• Growth stocks appear expensive based on the current situation but the price is potentially justified by the future situation.
• As a general rule, compared to growth stocks value stocks have tended to
– Pay higher dividends
– Be less risky
– Gain less during strong market climates
– Hold up better during weak market climates

Value and growth stocks (cont.)
• Industries more likely to have value stocks
– Financials
– Large oil companies
– Utilities
• Industries more likely to have growth stocks
– Technology
– Healthcare
– Consumer discretionary (homebuilding, media, entertainment)

Value
Large-cap
Large-cap value
Growth
Large-cap growth
Small-cap
Small-cap value
Small-cap growth

Diversification:
Improve safety by not putting all your eggs in one basket.

A properly diversified portfolio should have a better balance between risk and reward than any of its individual components
3
2.5
2
Real estate (REIT's)
Small cap value
S&P 500
Diversified
April, 2004:
REIT's lose 14%.
0.5
0
1.5
1
1998-2000: REIT's fall, S&P 500 pulls portfolio higher.
2002: Portfolio loses less than any of its separate components.

REITs and Small-cap Value have not always been more profitable than the S&P 500
70.00%
60.00%
50.00%
REIT fund average
Russell 2000 Value Index
S&P 500 Index Fund
Diversified equity mix
40.00%
30.00%
20.00%
10.00%
0.00%
-10.00%
-20.00%

Diversification in action:
The One-decision portfolio
Cash
60% of income half (30% of total portfolio)
Income half of portfolio
Stock half of portfolio
S&P 500
40% of stock half (20% of total portfolio)
Bonds
40% of income half (20% of total portfolio)
Small cap value
20% of stock half (10% of total portfolio)
REITs
40% of stock half (20% of total portfolio)

Compounded annual gains for the components of the one-decision portfolio 1980-2007
16%
14%
12%
10%
8%
6%
4%
2%
0%
9.0%
6.4%
14.3%
11.5%
12.7%
10.3%
US Bonds T-bills Russell
2000 Value
S&P 500 REITs
11.9% onedecision portfolio onedecision, no cash

0%
-5%
-10%
-15%
-20%
-25%
-30%
-35%
-40%
-45%
Drawdowns of the one-decision portfolio and its components
US Bonds T-bills
Russell
2000 Value S&P 500 REITs onedecision portfolio onedecision, no cash
-9%
-1%
-33%
-45%
-21%
-11%
-16%

0.025
0.02
Risk-adjusted performance
1980-2007
0.015
0.01
0.005
0
US
Bonds
T-bills Russell
2000
Value
S&P 500 REITs onedecision portfolio onedecision, no cash

Implementing the one-decision portfolio
Vanguard portfolio
• 20% S&P 500 Index fund
(VFINX)
• 10% Small-cap value index fund (VISVX)
• 20% REITs (VGSIX)
• 20% U.S. investment grade bonds (VBMFX)
• 30% cash (Vanguard
Prime Money Market or
NJ Tax-exempt money market if tax bracket is above 30%)
ETF/Fund portfolio
• 20% S&P 500 Index ETF
(SPY)
• 10% iShares S&P 600 Value
Index ETF (IJS)
• 20% iShares Cohen & Steers
Realty Majors (ICF)
• 20% U.S. investment grade bonds (AGG)
• 30% Highland Floating Rate
(XLFAX—only through discount brokerage with no load)

Trend-Following Strategies
• Attempt to recognize new long-term trends after they have begun (but early enough to be able to profit)
• Can outperform a broadlybased benchmark when a strong trend is in force.
• Can trail a broadly-based benchmark when the prevailing trend is in the process of changing or when there is no major trend.

240
220
200
180
160
140
120
100
Russell 1000 Value (large cap value)
Russell 1000 Growth (large cap growth)
1.3
1.25
Russell 1000 Value / Russell 1000 Growth
1.2
Rising means value stronger than growth.
Falling means growth stronger than value.
1.15
1.1
1.05
1
0.95
0.9
Sept. 2003-July 2006
Trend favored value.

180
160
140
120
100
240
220
200
Russell 1000 Value (large-cap value)
Russell 1000 Growth (large-cap growth)
Half value / half growth

2000
1800
1600
1400
1200
1000
800
600
400
200
MSCI Emerging Markets Index
MSCI Europe Index
4
3.5
3
2.5
2
1.5
1
0.5
0
0
1988-1994:
Emerging markets stronger
1994-1998:
Europe stronger
Rising = Em. Mkts stronger
Falling = Europe stronger
1998-2007:
Emerging markets stronger

Example: Selecting Which Part of the World in which to Invest
• iShares MSCI Emerging Market ETF (EEM)
• iShares MSCI Japan (EWJ)
• iShares S&P Europe 350 ETF (IEV)
On the last day of each quarter, select the single one of the three ETFs above that gained the most. Hold that for the upcoming quarter.

1800
1600
1400
1200
1000
800
600
400
200
0
Emerging Mkts
Europe
Japan
Active strategy average
Source: http://www.mscibarra.com

200
150
100
50
0
450
400
350
300
250
EEM
MSCI Em. Mkt
IEV
MSCI Europe
EWJ
MSCI Japan
Emerging markets: index and ETF
Europe: index and ETF
Japan: index and ETF

500000
450000
400000
350000
300000
250000
200000
150000
100000
50000
0
Hypothetical Growth of $10,000 1979-2008
Using Russell 1000 Value, Russell 1000 Growth
Russell 2000 Value, Russell 2000 Growth
Top 2 styles each quarter
Top style each quarter
Average of four styles

Implementing the U.S. Equity
Style Allocation Model
• iShares Russell 1000 Value ETF (IWD)
• iShares Russell 1000 Growth ETF (IWF)
• iShares Russell 2000 Value ETF (IWN)
• iShares Russell 2000 Growth ETF (IWO)
Advanced strategy
• Use iShares S&P 500 Growth ETF (IVW) and S&P 600 Growth ETF (IJT) instead of
IWF and IWO.

Current model recommendations for the first quarter of 2008
• Among U.S. equity investment styles, small and large cap growth are selected (IJT and
IVW)
• Among foreign markets, emerging markets are selected (EEM)

New ETFs That Can
Work for You.
Future investment results cannot be guaranteed.

Pros and cons of new ETFs
• New asset classes
(commodities and currencies).
• More international exposure.
• Higher dividend income
(Wisdom Tree, iShares DVY and PFF)
• New indexing methodologies might perform better than float weighting in certain investment climates
– Equal weighting (Rydex)
– Fundamental weighting (Wisdom
Tree)
• Specialized funds (PHO)
• Lower liquidity
• Higher expenses than original ETFs
• Unproven methods of index construction.
• Little real-time trading experience.
• Less transparency
(proprietary indexes such as Claymore,
Power Shares)

Promising New ETFs
• Exchange-traded Notes (ETNs) for commodity and currency exposure
• Investment income
– Equities with high dividend yields
– High-yield bond ETFs: PFF and HYG
– Tax-free bonds

iPath Exchange-Traded Notes (ETNs)
• These track investments that you otherwise could not buy or short directly.
• ETNs track a variety of commodity indexes and foreign currencies.
• Unlike ETFs, ETNs do not represent proportional ownership of a portfolio. Rather, ETNs are derivatives with Barclays as the counter-party.
• For now, ETNs enjoy better tax treatment if held for more than a year.
• Commodity ETNs have an expense ratio of
0.45%.

Example—DJ AIG Commodity
Index Total Return
• Goal is to match the return of an unleveraged investment in the underlying future including interest on cash collateral.
Energy
8%
9%
34%
Agriculture
16%
33%
Industrial metals
Precious metals
Livestock

59
57
55
53
51
49
47
45
DJP has closely tracked its benchmark iPath ETN (DJP, left scale)
DJ-AIG Commodity Index plus interest less 0.75%/yr (right scale)
206
196
186
176
166
156

30
25
20
15
10
5
0
-5
-10
-15
65
60
55
50
45
40
35
An example of poor ETF tracking: USO versus spot crude
Price Change (%) from 12/29/2006 to 1/15/2008
Crude oil spot
US Oil Fund (USO)
35
30
25
20
15
10
-10
-15
5
0
-5
65
60
55
50
45
40
2006 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2008

25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
-20.0%
Entire DJ-AIG Index
Agricultural
Industrial Metals
Energy

Mutual Fund Alternatives
• Oppenheimer Commodity Strategies Total
Return (QRAAX)—Active strategies to invest in commodities
• Pimco Commodity Real Return Fund
(PCRAX)—Invests in a passive mix of DJ-
AIG Commodity Index (same as DJP) and
TIPS.

250.00
200.00
150.00
100.00
50.00
0.00
Oppenheimer (QRAAX)
Pimco (PCRAX)
DJP (back-generated)

ETFs for Investment Income
• Preferred stocks: PFF has yielded 7%/year so far.
• High-yield foreign and U.S. stock ETFs from Wisdom Tree yield more than 5%/year
• Bonds
– Junk bonds (iShares HYG)
– Muni bonds (TFI, MUB)

5
0
-5
Preferred Stock ETF (PFF)
-10
Financial Sector SPDR (XLF)
-15
-20 Price changes since 3/30/20007
(%,excluding dividends)
-25
2007 May June July August September November December2008
5
0
-5
-10
-15
-20
-25

Selected Wisdom Tree Funds
• High Yield Emerging Market (DEM)—Energy, materials, telecom (yield 5.4%, expense 0.6%)
• Pacific Ex-Japan High Yield (DNH)—Mainly
Australian/New Zealand banks (yield 5.5%, expense 0.6%)
• Small-cap Dividend Fund (DES)—Majority financials (yield 5.9%, expense 0.4%) source: http://www.wisdomtree.com/etfs/estimated-dividend-yield.asp

High-Yielding Emerging Market Stocks
(DEM)—not overweighted in financials
Total Return (%) 7/13/2007-2/1/2008
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
Wisdom Tree HY Emerging Market (DEM) iShares MSCI Emerging Market (EEM)
Less volatile compared to EEM (but history is very short).

80%
70%
60%
50%
40%
30%
20%
10%
0%
Watch your style exposure
Total Return (%) 6/2006 - 1/2008
Wisdom Tree Pacific ex-Japan High Yield (DNH) iShares Pacific ex-Japan (EPP)
Both EPP and DNH are heavily weighted in Austrialian banks.

High dividends from small caps
25%
0%
-5%
-10%
20%
15%
10%
5%
Wisdom Tree Small Cap Dividend (DES) iShares Russell 2000 Value (IWN)
DES: 56% financials, IWN 34% financials. Yet, the investment behavior has been very similar (6/19/2006-2/1/2008)

Municipal Bond ETFs—Low costs should be a big advantage.
• iShares S&P National Muni Fund (MUB)—expenses
0.25%, SEC yield 3.4%, average maturity 8.9 years, 56 holdings.
• SPDR Lehman Muni Bond ETF (TFI)—expenses 0.2%,
SEC yield 3.3%, average maturity 9.3 years, 81 holdings.
• Tough competition: Vanguard Intermediate-term
Tax Exempt (VWITX)—Same yield, lower expenses, less interest rate risk, more diversification-expenses
0.15%, SEC yield 3.4%, average maturity 6.7 years,
1365 holdings

Miscellaneous ETFs
• Water resources (unavailable as a mutual fund)
• Utilities
– Large-cap: stick to basics
– Small-cap: Use Rydex Equal-Weight (RYU)

Water resources—a unique ETF (PHO) that is like a mutual fund in disguise.
50%
PowerShares Water
Portfolio (PHO) 40%
30% iShares S&P 400 Growth
Index ETF (IJK)
20%
10%
0%
-10%
0.7% expense ratio. Tracks the Palisades Water Index (?), whose component stocks are mostly mid-cap and small-cap growth.

Sometimes simple is best (utilities)
15%
10%
5%
0%
-5%
40%
35%
30%
25%
20%
Total Return (%) in Two U.S. Large-Cap
Utilities Sector ETFs, 9/21/2006-2/1/2008
PowerShares FTSE/RAFI Utilities (PRFU)
Utilities Sector SPDR (XLU)
Expenses: 0.23% for XLU; 0.75% for PRFU

For a free trial to our bi-weekly market newsletter,
Systems and Forecasts , visit us at www.systemsandforecasts.com

Appel Asset Management Corp.
www.appelasset.com