Four Reasons to Diversify Your Portfolio With Global Real Estate ETFs

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 |  Includes: DRW, FFR, RWX, TAO
by: Tom Lydon

In this day and age, if you want to maximize your portfolio, you’ll diversify with global assets and ETFs, and the international real estate market is no exception.

Investors should have learned three lessons from our economic upheaval: Bubbles pop, a broad-economic downturn will affect a diversified portfolio and the after effects of a recession will linger, remarks Andy Hyltin for Advisor One.

In an attempt to find new ways to manage and minimize risk, advisors are looking to global real estate investments. By combining U.S. and international real estate in portfolio, an investor may be better able to minimize risk while maximizing returns.

Going abroad may prove beneficial for a number of reasons:

  • Diversify. Going international means exposure to assets with lower correlations to the U.S. economy.
  • Opportunities. The U.S. real estate market is only a portion of the world’s commercial real estate market. The Prudential Real Estate Investors stated that U.S./Canada commercial real estate market was 30.2% of the global market in 2008, and the U.S./Canada share is projected to diminish to 26% by 2028.
  • Emerging markets. The emerging markets will likely continue to grow faster than the matured, developed economies, which will also drive commercial real estate growth in the developing markets.
  • Inflation hedge. Real estate, like other physical assets, could provide some protection against inflation.

There are several options if you’re looking at this market, but to see and analyze them all, drop by the ETF Analyzer. There are some significant differences between the available funds, and the differences can range from cost, country exposure and constituent weightings:

  • First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund (NYSEArca: FFR): FFR holds a large amount of the United States at 34.6%, making it the largest country in this fund. Hong Kong and Japan also have significant weights, which may give you some good exposure to the booming Asian market with a little U.S. diversification for good measure.
  • SPDR Dow Jones International Real Estate ETF (NYSEArca: RWX): Japan, Australia and Hong Kong are the main countries here, but there’s also a fair amount of Europe exposure, too.
  • WisdomTree International Real Estate Fund (NYSEArca: DRW): Hong Kong, Australia, Japan and France round up the top four countries in this fund, which has about 40 more holdings that RWX for some added diversification.
  • Guggenheim China Real Estate ETF (NYSEArca: TAO): TAO is an example of single-country real estate market exposure…or is it? Hong Kong actually accounts for 72% of the ETF, while China makes up 26.9%.

Max Chen contributed to this article.

Disclosure: None