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Why Infrastructure ETFs Are Overrated

Stocks in this article: IGF ACWI GII MOO

NEW YORK ( ETF Expert) -- Early in 2007, a prospective client informed me that he would not be placing his $1,000,000 portfolio with my company, Pacific Park Financial.

He explained that another Registered Investment Adviser specialized in leveraged emerging-market ETFs and that the firm's performance was amazing. I challenged the individual to better understand daily compounding versus annual compounding, though ultimately I recognized the infatuation for what it was.

Less than two years later, I received a phone call from a familiar voice. My one-time prospect expressed regret for selecting the other asset manager. He ruefully described losing $800,000 of his $1,000,000 savings as well as his marriage. And "...would I be willing to manage his small account ($200,000) with 100% emerging-market stock ETFs?"

As much as I would have liked to have helped, I needed to decline. I could not in good conscience contribute to the notion that gambling on emerging markets alone was the proper direction for any individual or family.

Some infatuations fade, though. More money has been exiting emerging market stocks, bonds and currencies than at any other point in the last two years. While it would obviously be cavalier to use leveraged long emerging stock ETFs now, it is certainly reasonable to revisit themes like rapid economic development in up-n-coming nations.

Indeed, the folks at Morningstar recently recommended the iShares Global Infrastructure Fund (IGF). They describe this exchange-tracker as a low-cost income generator for tapping an underrepresented sector; that is, a 4% yield is a phenomenal payment for holding a number of premier firms engaged in handling toll roads, railroads, potable water, waste-water and electricity.

The problem with Morningstar's assessment is threefold. First, there may always be a need for infrastructure improvement, but that does not guarantee profitable suppliers willing to fill the demand. The same case has been made previously with respect to food via "millions of more mouths to feed." Yet, agribusiness funds like Market Vectors Agribusiness (MOO) have struggled since their inception.

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