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Casey Smith is President of Wiser Wealth Management, Marietta, GA-based fee-only fiduciary wealth management firm offering asset management, tax preparation, estate planning and financial planning services. Wiser’s unique investing techniques has earned Casey speaking engagements at Inside... More
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Wiser Wealth Management, Inc
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  • Global Real Estate In Your Portfoio

    With the impact that the European debt crisis is having on portfolios, many people are looking for ways to diversify from this impact. Adding real estate to your portfolio is one way to do this. This decision could make sense if you are looking to diversify your portfolio's revenue stream.

    Historically, REITs have been structured to include investments mostly here in the US. However, over the last decade the structure has expanded to include REITs in a total of 21 countries, making a global REIT allocation possible in your portfolio. According to Cohen and Steers, from 1990 to 2010 the number of global publicly traded REITs increased from 33 to 250 companies.

    There are currently 18 domestic, seven foreign and three global REIT Exchange Traded Funds (ETFs) to choose from. During our search for real estate ETFs, we found it interesting that the highest Morningstar rankings went to the global REIT category. While four and five star rankings are only indicators of good past performance and reflect nothing into the future, it still sparked a bit of curiosity on our part as to the inner workings within the three global ETF choices.

    To understand the difference, a domestic REIT will invest in real estate companies within the US. A foreign REIT will invest in real estate companies outside the US; these funds often have ex-US in their title. A global REIT will invest in companies all over the world, including the US.

    The three choices for a global REIT ETF are as follows:

    • First Trust FTSE EN Developed Markets Real Estate (NYSEARCA:FFR)
    • Cohen and Steers Global Realty Majors (NYSEARCA:GRI)
    • SPDR Dow Jones Global Real Estate (NYSEARCA:RWO)


    The most important research into any ETF is knowing the methodology of the index that the ETF tracks. The methodology will explain the fund's performance, turnover and allocation.

    First Trust FTSE EN Developed Markets Real Estate (FFR) tracks the FTSE EPRA NAREIT Global Real Estate Index. This index is managed by committee and reviewed quarterly. The index is made up of developed and emerging market real estate holdings. The real estate companies represented within this index will get 75% of earnings (before interest, taxes, depreciation and amortization) from real estate activities. Companies that finance real estate, construct homes or hold infrastructure assets are excluded from the index. Companies that sell residential homes are only considered within emerging markets. The index holdings are tested for liquidity on an annual basis.

    Cohen and Steers Global Realty Majors (GRI) tracks the Cohen and Steers Global Reality Index. The index is managed by a committee and tracks the top 75 companies that in the committee's analysis are leading the securitization of real estate globally. Companies must meet minimum size and liquidity requirements, as well as final determining factors such as market position, financial strength and asset quality. Positions are limited to 4% of the index while also trying to maintain geographical proportional representation. The index is reviewed and rebalanced quarterly.

    SPDR Dow Jones Global Real Estate (RWO) tracks the same index as its name. To be included in this index, a company must be both an equity owner and an operator of commercial or residential real estate, as well as have its revenue derived from the ownership and operation of these assets. The company must have a minimum market cap of USD 200 million. Some companies, such as real estate finance companies and home builders, are excluded from the index. The index is float adjusted based on market capitalization. Index daily pricing data is available back to December 31, 2004. This index is reviewed and rebalanced quarterly.

    To see how the index methodology is applied, we looked at the top holdings for each REIT ETF.

    (click to enlarge)

    The listing shows that the funds' top five stocks are very similar; only the weight in each security seems to be the differentiating factor. Looking deeper into this, we find that this is also the case for the top twenty-five holdings of the three ETFs. RWO and FFR have a similar number of holdings, at 213 and 286 respectively. GRI holds 75 securities and caps the weight at 4% as defined in the index methodology.

    We can also break down the ETF holdings by market cap. The chart below shows that FFR and RWO hold more weight in mid caps while GRI holds more large/giant caps.

    (click to enlarge)

    Breaking down the ETFs into their respective country weights, we see that for each ETF the top five weights are the same: USA, Australia, Japan, Hong Kong and the UK (highlighted in yellow below). The slight variation in weight from one ETF to another can be explained by index methodology.

    (click to enlarge)

    We can look to correlation to help show us how REITs have reacted to each other and major indices over the last few years. As you can see in the chart below, all three ETFs are highly correlated to each other, as expected given what we have observed in holdings and country exposure. We also note that we should expect the REIT ETFs to closely move with the S&P 500 and MSCI EAFE (developed Europe) indexes. The ETFs are negatively correlated with the US Dollar. The chart below shows correlation from 7/1/07 to 6/30/2012.

    Many investors deploy the use of REITs for the income that they generate. FFR has a 12-month yield of 2.35%, GRI's yield is 2.31%, and RWO's is 3.03%.

    The fees associated with ETFs are usually much less than mutual funds. The expense fee for FFR is 60bps, GRI is 55bps, and RWO is 50bps. Unlike mutual funds, however, this is not the only expense. How you trade ETFs is also related to your expense. ETFs trade with a bid and ask just like stocks. Your purchase price if at a premium to the funds net asset value (NYSE:NAV) would in theory add an "expense" to your investment. Of course, if you also sell the fund at a premium then you would recapture that cost.

    Contrary to many articles on the internet, low trading volume or low fund assets do not mean that you cannot trade the ETF at or near NAV, you just have to have the right tools to make it work efficiently for you. Any ETF can be shut down, but a fund with less than 100 million in assets has a higher risk of being closed due to lack of interest. Fund closings have historically been done in an orderly fashion.

    Currently FFR has 87 million in assets and an daily average trading volume of 18,800 shares. GRI has 64 million in assets and a 9,700 average daily trading volume. RWO has 461 million in assets with a 91,000 average daily trading volume. The tradability ranking would go to RWO in this analysis, based on its relative high volume and assets under management. We also note that RWO trades free of transaction charges at TD Ameritrade.

    The historical performance of these funds differ greatly, however volatility looks to be very similar. The unique strategy of GRI does not appear to have much of a performance difference between these funds. Because the ETFs have not been around for 10 years we note that the below chart uses the index data where ETF data is not available. The index for FFR is not available for 10 years.

    (click to enlarge)

    (click to enlarge)

    FFR, GRI and RWO represent many of the same global REIT stocks but with different weightings. RWO looks to be the the leader in assets and ease of trading. In the end, each of these ETFs are going to give you the global REIT exposure you are looking for. As to which one is best for you depends on which index methodology makes you more comfortable.


    Mitchell Williams, Wiser Research Intern, contributed to this article

    Index Methodology




    Disclosure: I am long RWO.

    Jul 24 9:11 PM | Link | Comment!
  • 401k Plans Need ETFs

    There has been a lot of discussion concerning the use of exchange traded funds (ETFs) as the primary investment vehicle within 401k plans. The barriers that once stood in the way are being removed by innovative record keeping and the growing use of ETFs in private and institutional accounts. There are some compelling reasons as to why ETFs can force the door open into 401k plans across America.


    We all believe, or want to believe, that we are winners. This mindset can take us far in life, but it is not necessarily how we should approach portfolio management. Of course we want to win in investing, but investors should focus long term, not on the hot stock, sector or asset class of the year. There is a growing realization that actively trading stocks and bonds for short-term gain is a losing bet. We see this in a University of Maryland Study that shows, adjusted for risk, only 0.06% of fund managers beat their index from 1975 to 2007. 1975 is an important year as this is the conception of the Vanguard S&P 500 Index fund.

    The buy and hold indexing approach is being fueled by two things: disenchantment with high-cost, under-performing active mutual fund managers; and the migration of brokers from commission firms to fee-only platforms where a fiduciary responsibility forces a better look at active mutual fund management. These issues have increased the use of index funds, specifically exchange traded funds. As plan participants want their 401k accounts to look like their private accounts, ETFs are building momentum to fill this void, especially in small to mid size 401k plans. Plan fiduciaries also realize that adding indexing to active management plan options reduces their liability.


    If a plan participant can save 1% a year in investment costs on a $20,000 portfolio, over a 20 year period that participant would have 17% more money, not accounting for any performance differences. The benefit of cost savings are more apparent over the last market decade where portfolio rates of return have been nearly flat after the 2000 tech crash, September 11th and the 2008 financial crisis. The average mutual fund costs 1.15%, where the average iShares ETF costs 0.45%. Core ETFs would be much less.


    Index funds offer great diversification. IVV or SPY hold all 500 stocks within the S&P 500, where as a similarly styled actively managed mutual fund may hold only 40 - 60 equities, some not even listed on the S&P 500.

    ETFs can also provide plan participants access to harder-to-reach asset classes such as emerging market bonds, frontier markets, international bonds or commodities. All of these asset classes can be held at a cost of less than 0.50%.


    Ask any plan participant, or in some cases the plan sponsor, how much their plan costs. This includes the administration and investment fees. Very few will be able to tell you. In 2012 there is new regulation that will help change this, but up until this point transparency has been about as clear as a muddy river. Exchange traded funds provide a daily look into what is held within the portfolio, and management fees are fully disclosed. Add a report showing the participant plan administration fee and you will have a very transparent 401k.


    One can argue that large plans have the negotiation power to lower plan participant investment costs. This is true to a certain extent. In some cases a Vanguard Index Tier may be more beneficial to plan participants versus exchange traded funds. The Vanguard Index Tier can drop investments costs below 0.05% if the plan is large enough. Indexing as an option if desired in these plans, whether it is an index mutual fund or exchange traded fund.

    The real benefit for ETFs falls in plans with less than $100 million in assets. These 401k plans are currently being serviced by industry leaches such as the Hartford, VALIC, and other annuity-based 401k/403b plans. Participants in these plans can pay nearly 3% annually in fees. Lowering their costs by 2% would be huge.

    For some plans that do not offer any form of indexing, often the plan sponsor has allowed the plan provider to offer a brokerage link account. This is where a participant is allowed to move all or a portion of their 401k balance into a brokerage account under the 401k umbrella. Within this account a plan participant can purchase most equities and bonds including index mutual funds and Exchange Traded Funds.


    An exchange traded fund trades just like a stock, which means that they can be traded intraday with a bid and an ask spread. A net asset value (NYSE:NAV) is also calculated; NAV is the value of the underlying securities. Mutual funds, on the other hand, trade at day end on NAV. There is a good probability that an intraday purchase of an ETF could be made at a value greater than the NAV, which is not a good thing for 401k plans. This issue has been solved by not allowing intraday trading of ETFs inside a 401k. Transactions will take place at the end of the day, just as mutual funds are currently traded. There has been noise that mutual funds have the same NAV issue but at a different level. There is debate that ETFs could, in the end, be traded more efficiently than mutual funds. This is actually good news for proponents of ETFs within 401ks, as just a short time ago this was a case-closed win for mutual funds.

    Another barrier for ETFs has been record keeping. Up until recently, accounting systems would only handle mutual funds. Participants can hold fractional shares of a mutual fund. ETFs trade in whole shares. This has changed; through new techniques fractional ETF ownership is possible.


    Several companies are offering ETFs within 401k plans. The larger players are ING's Sharebuilder 401k, Charles Schwab, Invest N Retire, WisdomTree, iShares and TD Ameritrade. All of these companies have invested into architecture that allows for the efficient use of ETFs within a 401k plan.


    Plan sponsors that use ETFs within their plans are innovators, and the organizations understand investing at a level higher than the average sponsor. As CFOs and HR directors learn about indexing and the use of exchange traded funds, the ultimate winners will be plan participants.

    Jul 24 5:29 PM | Link | 1 Comment
  • Hedging a Falling Dollar

    We often get questions about what can be done in a portfolio to protect from a falling dollar. Often people refer to gold for this solution, especially when every other advertisement on Fox News is from companies trying to sell you- guess what- gold!

    Another most often heard answer is owning foreign currency, which has its own risks. Both this and the gold strategy have something in common – neither pay any type of interest or dividend.

    A few years ago we looked at the falling dollar and decided that there had to be another angle to this issue. We found gold to be a difficult purchase. Historically it has not been a good investment, as it has no manufacturing purpose and pays nothing to own it. Owning foreign currency is not as transparent as one would think. Funds that trade or hold currency do not actually hold real currency but track future contracts related to global currency. This creates returns that do not exactly match the movement of the dollar because of additional unwanted variables within the contracts.

    Part of the Wiser Wealth solution to a falling dollar lies in our allocation to the ETF iShares S&P/Citigroup International Treasury Bond Fund (NASDAQ:IGOV) . IGOV is an international treasury bond fund holding foreign government bonds from around the world in their local currency. With 624 bonds from 20 countries , IGOV has returned 4.35% year to date and yields 3.53% (as of 9/30/11), while the US Dollar index has rebounded to just above flat year to date.  The chart below shows IGOV’s negative correlation with the US Dollar over the last 6 months.

    The iShares S&P/Citigroup International Treasury Bond Fund (IGOV) has an expense ratio of 0.35%. The fund has an average duration of 6.35 years. IGOV is a passive index dollar hedge play that has a yield. The ETF tracks the S&P/Citigroup International Treasury Bond Index Ex-US. The index methodology is to track a broad diverse group of international treasury bonds with maturities greater than one year and which are market value weighted. The index is rebalanced monthly, with country weights changing annually using January-end data. There will be no country weighted more than 24.95%, and countries weighing less than 10bps are removed. The top 5 countries are as follows: Japan 23.16%; Italy 8.74%; France 7.99%; Germany 7.81%; and the Netherlands 4.88%. The fund currently has 266 million in assets.

    Despite the USD recent comeback, we see any future government stimulus only weakening the currency further. IGOV can be used to help cushion the blow to a falling dollar.


    Disclosure: I am long IGOV.
    Oct 05 9:12 PM | Link | Comment!
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