DRW's Exposure To China/Hong Kong Real Estate Hurting Recent Performance
Summary
- WisdomTree Global ex-U.S. Real Estate Fund uses an in-house benchmark to select its holdings. Current exposure in China and Hong Kong is hurting performance.
- This article will explore DRW in detail and how its index differs from those used by two competitors: RWX and IFGL.
- Investors' feelings about China and other EM exposure is important as RWX and IFGL only invest in Developed markets.
- While I think investors should invest Internationally, Real Estate does not hold up well against its US counterparts. For that reason, I am Bearish on DRW.
- Looking for more investing ideas like this one? Get them exclusively at Hoya Capital Income Builder. Learn More »
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(This article was co-produced with Hoya Capital Real Estate)
Introduction
Real assets, such as buildings, homes, malls should do well if inflation becomes a concern not just in the United States, but around the world. The National Real Estate Stock Fund was formed in 1985 as the first open-end mutual fund devoted to REITs and other real estate securities. The iShares Dow Jones Real Estate Index Fund (IYR) was launched in 2000, making it the first REIT ETF. All that history is just to say I could not find a REIT fund that existed during the great inflationary 70s and early 80s.
Except for the dip during the 2008-09 GFC, world home values have been on a steady climb. Whether this translates into other real estate climbing as rapidly is debatable as the commercial and residential values are driven by multiple and mostly different factors.
While I think investors should invest Internationally, Real Estate does not hold up well against its US counterparts. For that reason, I am Bearish on DRW.
Inspecting the WisdomTree Global ex-U.S. Real Estate Fund
Seeking Alpha describes this ETF as
DRW launched by WisdomTree Investments, Inc. It is co-managed by Mellon Investments Corporation and WisdomTree Asset Management, Inc. It invests in public equity markets of global ex-US region. The fund invests in stocks of companies operating across mortgage real estate investment trusts (reits), financials, diversified financials and real estate sectors. The fund invests in growth and value stocks of companies across diversified market capitalization. The fund invests in dividend paying stocks of companies. The fund seeks to track the performance of the WisdomTree Global ex-U.S. Real Estate Index. DRW started in 2007.
Source: Seeking Alpha
DRW has $59m in assets and currently yields 7.4%. WisdomTree charges 58bps in fees.
Index review
WisdomTree, as is becoming more common, developed their own Real Estate index for the DRW ETF to use. Besides not paying index fees to another firm, to me the advantages and disadvantages are the same: the firm is in total control over the ETF.
This is the description provided by WisdomTree:
The WisdomTree Global ex-U.S. Real Estate Index is a fundamentally weighted index that measures the performance of companies from developed and emerging markets outside of the United States that are classified as being part of the “Global Real Estate” sector. The Index is comprised of real estate companies with market capitalizations greater than $1 billion. Companies are weighted in the Index based on regular cash dividends paid. The Index includes the following types of companies: real estate operating companies; real estate development companies; and diversified real estate investment trusts or “REITs.” The Index also includes companies that may be classified as Passive Foreign Investment Companies (PFICs). The Index was established with a base value of 200 on June 3, 2011 and is calculated in US dollars and updated to reflect market prices and exchange rates.
Source: wisdomtree.com Index
The index limits any country to 25% and also applies liquidity rules. Use this link to see full methodology document. A separate document provides allocations and how those investment decisions affected performance. These charts are not perfect as the index used by DRW is compared to an Equity, not REIT, index, but it does give flavor to index used. Later, we will see how the three REIT ETFs allocated by these factors. First, we will look at size.
Source: wisdomtree.com (data for one year)
So while DRW was up 16.42%, the equity index did better by 13.24%. Compared to the equity index, DRW has half the weight in Large-Cap holdings as the broader equity index, and that accounted for most of the underperformance (9.11%) caused by asset size. I also looked at how the country allocation effected the results.
Three of the biggest performance distracting countries were in the Far East (China, Hong Kong, Singapore), with the other biggest distractor being Germany. All wasn't bad for Asia, as Japan provided the best allocation bang.
If one makes the assumption that the Real Estate/Equity performance ratio was close regardless of country, the same with size, the above tables show how allocations matter.
Holdings review
Source: wisdomtree.com
Half the top weights were in countries where REITs trailed the equity market in the same country. The Chinese and Hong Kong property market problems have made headlines recently. Offsetting that, is the 25% weight in Japan and Australia that added to performance.
Source: wisdomtree.com
Real Estate Operating Companies (22.08%) actively invest in properties—generally commercial real estate, unlike REITs. Real Estate Development (18.52%) does as the name implies. Various activity-focused REITs make up most of the rest after the 18.45% in Diversified Activity holdings. By using the above link, one can see what companies fall under each classification.
The Top 20 holdings are:
Source: wisdomtree.com
I mentioned Germany was a negative. Well the largest holding is German and it was down 6.4% over the past year.
Payout review
Source: seekingalpha.com DVDs
Your eyes are not missing lines, DRW skipped three payments in 2020 and also missed some before that. All payments since 2014 have been ordinary income. Those missed payments then restarting apparently throws the Seeking Alpha grading process for a loop. The 7%+ yield surely helps.
Source: seekingalpha.com DVD scorecard
Comparing DRW to a pair of competitors
I looked for two large international REIT ETFs that used different benchmarks from each other. This section will compare DRW against the SPDR Dow Jones International Real Estate ETF (RWX), which uses the Dow Jones Global ex-U.S. Select Real Estate Securities Index and the FTSE EPRA/NAREIT Global Real Estate ex-U.S. Index ETF (IFGL), which uses the FTSE EPRA Nareit Developed ex US Index.
Seeking Alpha describes RWX as
RWX is an exchange traded fund launched by State Street Global Advisors, Inc. The fund is managed by SSGA Funds Management, Inc. It invests in public equity markets of global ex-US region. The fund invests in stocks of companies operating across real estate sectors. It invests in growth and value stocks of companies across diversified market capitalization.
Source: seekingalpha.com RWX
Seeking Alpha describes IFGL as
IFGL is an exchange traded fund launched by BlackRock, Inc. It is managed by BlackRock Fund Advisors. The fund invests in public equity markets of global ex-US region. The fund invests in stocks of companies operating across mortgage real estate investment trusts (reits), financials, diversified financials, real estate sectors. It invests in growth and value stocks of companies across diversified market capitalization.
Source: seekingalpha.com IFGL
Source: Seeking Alpha Peers screen; consolidated by Author
DRW is the smallest of the three and yields 3X what either of the others do, but remember its history of missing payments. Also, the 4-year average yields of all three are close.
The type of REITs held various by ETF based on the underlying index differences. Classifications vary by vendor.
Source: ETF.com (DRW/RWX), iShares (NASDAQ:IFGL); compiled by Author
Here is how the three compare by country allocation:
Source: Fidelity various
I noted that only DRW is permitted to own Chinese assets. Here is also some of the arbitrariness of the Financial industry: Hong Kong is classified as Developed as thus eligible for RWX and IFGL. It's just a matter of where the asset trades or is incorporated.
Source: Fidelity various
This shows again why the index rules matter as no company appears in the Top 10 across the board.
Source: wisdomtree.com
Despite the fact the holdings overlap varies from 43-63%, the performance correlation between the three runs from 93-95%.
Based on this set of data, DRW seems to have more of a Value slant than the other two.
Source: wisdomtree.com
Using PortfolioVisualizer, this is how the three have performed dating back to 2007.
Source: portfoliovisualizer.com
You can see how they moved closely until DRW trailed off in 2021.
Portfolio Strategy
Real Estate seems to be an allocation where going international is not a long-term trade but one that needs to be timed. Only three years did DRW beat the Vanguard Real Estate ETF (VNQ); four times versus the IQ U.S. Real Estate Small Cap ETF (ROOF).
While I think investors should invest Internationally, Real Estate does not hold up well against its US counterparts. For that reason, I am Bearish on DRW.
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This article was written by
I have both a BS and MBA in Finance. I have been individual investor since the early 1980s and have a seven-figure portfolio. I was a data analyst for a pension manager for thirty years until I retired July of 2019. My initial articles related to my experience in prepping for and being in retirement. Now I will comment on our holdings in our various accounts. Most holdings are in CEFs, ETFs, some BDCs and a few REITs. I write Put options for income generation. Contributing author for Hoya Capital Income Builder.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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