Examining Three Global Real Estate ETFs

by on November 3, 2011 | ETFs Mentioned:

The housing sector has been rather difficult to predict in the past few years. Once the U.S. housing bubble burst and the Great Recession began, investors pulled out of a number of domestic equities fearing that the crisis would last for quite some time. Unfortunately, those investors were correct, as housing in the U.S. is still fighting to reach pre-recession levels. In fact, the S&P/Case-Shiller Home Price Index is just now reaching 2003 levels at around 155-160. To recover to its 2007 high, the index needs to get up to about 225, an increase of about 45%. As such, investors have begun to look abroad for their real estate exposure, as a stagnant U.S. economy seems to offer little in the way of potential [see also Time For A Real Estate ETF?].

As the ETF world has rapidly expanded, so too have the options for allocating to this coveted asset class. Below, we detail three global real estate products and which investors might be interested in each.

SPDR DJ Wilshire Intl Real Estate (RWX)

By far the most popular option in our Global Real Estate ETFdb Category, RWX offers supreme liquidity with over $2.2 billion in assets and an average daily volume nearing 500,000. The fund tracks an ex-U.S. index that offers exposure to markets all over the world, with Japan, Australia, and the U.K. leading the allocations. From a market cap perspective, this product has over half of its assets in large cap firms, giving it a nice stability, though it does feature a fair amount of exposure to mid and small caps. RWX also features a handsome diversity, as it holds nearly 130 securities with no single holding making up more than 6.3% of the entire ETF. Investors may be concerned to see Japan as the top country allocation given that the Japanese have had their fair share of housing issues, so for those wary of Japan’s economy, RWX is not your best option. Investors should note, however, that Japan will have a significant place in any global fund given its size as an economy. Finally, the ETF pays out a robust dividend yield of 4.3% [see also First Small Cap REIT ETF Debuts: ROOF].

The fund will be a good buy and hold for those looking for long term international exposure to this sector. Its high liquidity also makes it the primary trading option for this ETF sector as it will allow for easy moves of big positions intraday. For investors bearish on Japan, the fund”s near 20% allocation to this country will likely be enough to scare you away, but there are better-fitting options for these traders.

Global ex-U.S. Real Estate Index Fund (VNQI)

Another ex-U.S. product, VNQI features a different strategy, as REITs are also eligible for inclusion in its underlying index. VNQI tends to spread its securities across giant, large, and mid cap exposure, establishing a healthy risk/return profile. From a country/region perspective, Hong Kong (17.8%) takes the top spot followed by Japan and Australia. For those looking to avoid a major bet in Japan, VNQI does a good job of weighting other regions in order to alleviate concerns. As far as diversity is concerned, VNQI is the best option. With approximately 425 holdings and just 25% of assets dedicated to the top ten, this ETF spreads its funds around better than most. Also, its low cost structure of just 35 basis points (compared to 59 for RWX) makes it ideal for a buyer wishing to create a longer-term position [see also Dividend ETF Special: 25 Equity ETFs With Attractive Distribution Yields].

For buy and hold investors, this fund is likely the best option, as it features a strong diversity and minimal expenses. Its downsides are its liquidity and young age; the fund is just barely a year old and its volume and assets are no match for RWX. If you are looking to avoid REITs, this may not be the best pick for your portfolio.

FTSE EPRA/NAREIT Global Real Estate ex-U.S. Index Fund (IFGL)

This ETF tracks and index which measures the performance of REITs listed in developed markets outside the US. REITs typically offer high yields, making them attractive to value investors. But with a high rewards comes a significant amount of risk that these securities are usually handcuffed to, so proceed with caution. The fund spreads its assets out across companies of all sizes, though it tends to favor large cap firms. IFGL also has a nice diversity and with nearly 200 holdings it falls somewhere between RWX and VNQI as far as a healthy spread is concerned. From a country perspective, Japan, Hong Kong, and Australia are the top three allocations, three countries that these funds all have in common. The fund has a 30-Day SEC yield of just 3.7%, relatively low by REIT standards and may not be worth the risk, especially given that RWX has a higher payout [see also 25 Things Every Financial Advisor Should Know About ETFs].

Value investors may be disappointed by the low dividend payout, but note that IFGL has a 12 month yield of 7.8%, leaving major upside potential for dividend growth. For risk averse investors this fund probably won’t be very appealing, but for those in search of a juicy yield, IFGL has the potential to be a star [see also Bond ETFs In Focus: Defining All The Yield Metrics].

Disclosure: No positions at time of writing.