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 which you can read here. 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 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, IMO, 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.
I'm supposed to head down to Phoenix today but I may be late. OK, this will be the last of the Swiss ice pictures.
5 comments:
It appears that investors are bombarded with new ETFs on an almost daily basis. Attempting to get a handle on all of them is a daunting task. As an individual investor, I can be my own worst enemy and dive into a few of the increasingly risky ETFs, make errors, pull out and give myself a headslap. Financial planners are different. They are trusted to appropriately manage clients' hard-earned money. Roger's post serves as a reminder that getting too excited about every new product, leading to overtrading and underperforming, needs to be tempered by sticking to a sane portfolio gameplan.
Along these lines, I think it is very useful to know what components comprise many of these ETFs.
The Wisdom Tree small cap (DES) for instance has a very heavy weighting towards REITs. I ran correlations with DES against all the major REIT ETFs (ICF, IYR, RWR, VNQ) and all 4 of them had .95 or higher correlations with DES since its inception last summer. If you don't know what's under the hood you might end up overweighting some theme you did not intend to.
DES does have 21% in REITS. But, I would not be willing to say that it is equivalent to a REIT index. Just because they have "behaved" the same, ie correlation, does not mean they will bahave the same in the future, or under different circumstances.
I second G's comment. Correlations can be spurious, particularly when some websites do not give period of time associated with r. Best to know components and to look at them side by side on a performance chart. I do like correlations, though, as in a portfolio matrix for a macro determination if I am achieving diversity. Curious as to where others would draw the line at "low correlation." I am considering below .70 for no more than 10 percent of tickers, after that, below .55. Very subjective choice of numbers. All the caveats of diversification apply, as in if there's a disaster/tragedy all bets off.
Roger's post, as well as the comments on it, motivated me to lob in my first comment to Roger's blog, although I've been reading it appreciatively for many months. Roger frequently writes how he would often rather buy a high-yielding stock that captures most of the effect of a particular ETF (i.e., high correlation) rather than the ETF itself. But my question relates to finding two assets with very low correlation. What resources are out there for finding the correlation (albeit historical)between two or more asset classes or stocks?
Roger sometimes shows graphs showing how closely two ETFs track each other, and I don't even know where to find those. But if he can do that, I would think the information must be out there in some searchable form so I could find pairs of assets with very low correlation, but I've never seen this information.
It's probably obvious, but the reason to do so would be to take advantage of the benefits of diversification--in my case, to hopefully capture higher returns by buying two high volatility assets with low correlation, rather than having to accept lower returns by buying a lower volatility (but emotionally more tolerable) single asset.
Roger, any thoughts you have would be appreciated. I think your blog stands out among all other financial blogs for your clarity, humility, and insight. I really appreciate the hard work you put in, and think feedback from your readers is the least you should expect. Thank you.
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