Last week I looked at iShares FTSE EPRA/NAREIT North America (IFNA), so I thought this time I would focus on iShares FTSE EPRA/NAREIT Developed Europe (IFEU), which tracks the FTSE EPRA/NAREIT Developed Europe Index (EPRA). That's because a well diversified global real estate portfolio will have exposure to Europe (and Asia) as well as North America, so it's important for investors to have a sense of what the history has been.
IFEU reports an expense ratio of 0.48%, a 12-month yield of 6.25%, and annualized performance difference (tracking error) of +0.28%.
Since January 1990, EPRA has shown composite annual average total returns of 5.23%. That's not very good historically compared to other REIT investments - including IFNA, which returned a spectacular 12.61% over those 21-plus years - but some analysts believe that returns in Europe (especially the U.K.) going forward will be significantly stronger than in the past. (I'll post a separate article focusing on those predictions.)
The Sharpe ratio (measuring risk-adjusted returns) for EPRA was 0.185, which is very poor for real estate investments - and even for global equity investments, with 85% of global equity benchmarks providing stronger risk-adjusted returns over that historical period. The Sharpe ratio is excess returns (that is, returns minus the return you could have gotten with no risk at all) divided by volatility; volatility was actually fairly low in Europe, which means that the reason EPRA's Sharpe ratio has been so poor was because of its returns.
The real value of adding IFEU to your portfolio would be in terms of diversification. EPRA has an average correlation of just 54.2% against the Dow Jones Total Market index and a beta of just 0.65. Both of those are quite low for global equity investments (and even for global REIT investments), meaning that IFEU should provide very strong diversification benefits against a domestic stock allocation and should bring down the volatility of any portfolio that also includes U.S. stocks.
Moreover, EPRA also has a low correlation of only 65.7% and low beta of only 0.65 against domestic REIT indexes (such as the FTSE NAREIT All REITs Index, or even the FTSE EPRA/NAREIT North America Index), meaning that IFEU should do well in diversifying your domestic REIT allocation and should bring down the volatility of your U.S. REIT portfolio.
Disclosure: I am long Vanguard REIT Index Fund and ING Global Real Estate Fund.
Disclaimer: The opinions expressed in this post are my own and do not necessarily reflect those of the National Association of Real Estate Investment Trusts ((NAREIT)). Neither I nor NAREIT are acting as an investment advisor, investment fiduciary, broker, dealer or other market participant, nor is any offer or solicitation to buy or sell any security investment being made. This information is solely educational in nature and not intended to serve as the primary basis for any investment decision.