International REIT ETFs: A Good Candidate For Tactical Asset Allocation

by: MyPlanIQ

International REITs are Real Estate Investment Trusts for global properties and real estates. REITs have been well recognized as a useful asset class for portfolio diversifiction. Interested readers can refer to an article by William L . Burns and Donald R . Epley on Journal of Portfolio Management The Performance of Portfolios of REITs + Stocks or many other excellent studies in this subject.

International REITs have the following advantages:

  • They offer an inflation hedge. REITs are generally anti-inflation, as landlords will react to inflation by raising rents, driving more U.S. consumers to purchase homes
  • The U.S. housing market is returning to historical rates, offering stability and the potential for sustained growth in the market.
  • Because REITs are required by law to return 90% of taxable income to shareholders, many REITs offer strong yields.
  • Managements in REIT companies are more shareholder friendly and they are more fiscal conservative: because of the 90% taxable income dividend requirement, they can't simply take the cash and fund their pet projects, which have been seen very often in other companies.
  • U.S. dollar devaluation hedge through currency appreciation.

As of 09/09/2011, the following table shows the performance of several international REIT ETFs:

Description Symbol 1 Yr 3 Yr 5 Yr Avg. Volume(K) 1 Yr Sharpe
SPDR Dow Jones Intl Real Estat RWX 3.82% -0.58% NA 401 21.6%
iShares FTSE EPRA/NAREIT Dev Real Estate IFGL -5.38% -3.1% NA 42 -37.08%
SPDR Dow Jones Global Real Estate RWO 6.77% -1.84% NA 96 44.08%
iShares S&P Dev ex-US Property WPS 0.89% 2.19% NA 18 5.19%
WisdomTree International Real Estate DRW 4.87% 1.27% NA 30 23.58%

RWX is used by MyPlanIQ Diversified Core Allocation ETF Plan. On the other hand, one can see that WisdomTree International Real Estate and iShares S&P Dev ex-US Property deserve some consideration. However, WPS has the following holding breakdown (from iShares):

Sector Breakdown as of 9/8/2011
Real Estate Investment Trusts (Reits) 50.32%
Real Estate Management & Development 49.02%
S-T Securities 0.06%
Industrial Conglomerates 0.04%
Other/Undefined 0.57%
Total 100.00%
iShares S&P Dev ex-US Property

WPS is in fact a mix of REITs and Real Estate Development, making it much riskier and not exactly the ideal candidate for international REIT exposure.

Though international REITs have been down recently, along with general equity markets, they are still ranked higher among those risk assets:

US Stocks VTI -1.52% -2.06% -9.39% -11.16% 7.94% -3.24%
International REITs RWX -4.62% -3.01% -10.66% -8.47% 3.66% -4.62%
Frontier Market Stks FRN -4.04% 1.25% -9.95% -6.73% -6.7% -5.23%
Emerging Market Stks VWO -3.83% -2.88% -12.85% -11.26% -0.53% -6.27%
International Developed Stks EFA -5.76% -7.84% -15.94% -16.23% -4.99% -10.15%

For more details, see Asset Class Trend.

The takeaway is that investors should pay attention to international REITs, among risk assets. When these markets rebound, international REITs should offer a good candidate for asset class exposure.

Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

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