How to Evaluate a New ETF

Roger Nusbaum submits: A reader asks:

Re: GII.. the new global infrastructure ETF. The concept of this appeals to me, and when a new ETF comes up that has merit for me, I like to plug into my data base another ticker that can be used as proxy. Do you have a suggestion of something that I can watch trade to see how closely the two moved together?

I think the answer is very open ended. He is asking about the new Macquarie Global Infrastructure ETF (GII). I wrote a profile of it for TSCM. To me, GII seems like more of a foreign utility fund than anything else. If you think that is true it would make sense to track it with WisdomTree International Utilities ETF (DBU) -- the two have a lot of overlap.

Leaving it at that probably falls far short of completing the task. After looking under the hood you will see a lot of utilities. Usually this sector will be less volatile than the broader market, which makes an argument for tracking versus the S&P 500 or some other broad-based index. I realize there is a lot of foreign content, but I would want to know how volatile a new ETF is relative to the index I benchmark against. In adding something new to your portfolio, it either adds volatility or reduces it. GII should reduce it, but it needs to be watched for a while to know. Maybe iShares S&P Global Utilities Fund (JXI) should be added to the study?

Then what about common stocks? Sticking with GII as a proxy for utilities, I generally prefer individual domestic stocks for this sector. So part of my thought process has to be: Will GII be better than any of the common stocks that I currently own?

Another possible aspect to consider is should utilities be a sector where I start to add foreign, instead of another sector. I have foreign in every other S&P sector except discretionary (and utilities). Maybe I should have foreign exposure here too.

All of this is for perpetual study, for the way I do my job. I have written many times about studying new products as they come. I don't use what I would say are a lot of new products, but occasionally I do integrate something new into the mix.

Comments

[William Vou...:]

great stuff on your site, but i have a question to ask of Roger, and any other individual who posts comments about ETFs:

Why do you think Jim Cramer believes ETFs are bad?
Check his link for a video commentary on this subject:

www.thestreet.com/_tsc...

this topic is crucial to me, as i would like to begin using ETFs in a separate long term trading portfolio...i pretty much focus on index futures trading now

thanks

Will Vourlas

2007 Feb 07 11:33 PM

[Roger Nusbaum:]

I wrote an article for TSCM in specific response to his video which you can read here.

2007 Feb 08 11:37 AM