Credit: Shutterstock photoThe proliferation of publicly traded real estate investment trusts (or REITs) has created access to a global menu of high dividend paying securities. REITs function by generating income from rents and property development that is ultimately passed on to shareholders in the form of dividends.
This creates a highly coveted asset class for income oriented investors to park their capital outside of the traditional methods of stocks and bonds. In addition, accessing these REITs has never been easier through low-cost exchange-traded funds that allow you to hone in on specific sectors, geographies, or broad-based themes.
The largest ETF in the real estate space is the Vanguard REIT ETF (VNQ), which has a whopping $28.8 billion in total assets. VNQ invests in a broad basket of 140 U.S.-listed REITs that include residential, office, hospital, and retail sectors.
One of the most attractive qualities of this fund is its miniscule expense ratio of 0.10%, which ranks among the lowest of its peers. This factor alone has likely been one of the foremost drivers of asset accumulation in VNQ over the last several years.
After a strong run in 2014, VNQ has come under fire this year as interest rate volatility has deflated prices down to the 200-day moving average. This ETF is now 11% off its high and solidly in the red for the year.
The price action in REITs is typically driven by a variety of factors that include the direction of interest rates, real estate prices, and overall stock market momentum. Recently, those factors have coalesced to swing the momentum needle in favor of international REITs versus those domiciled here at home.
The Vanguard Global ex-U.S. Real Estate ETF (VNQI) provides diversified exposure to over 600 REITs in 30 different countries around the globe (excluding the United States). In effect, this ETF is a broad representation of the publicly traded REIT market in Asia, Europe, and other emerging market countries.
The accommodative fiscal policy measures of central banks in Europe and Asia along with renewed strength in international equities has been a tailwind for VNQI. So far this year, this ETF has gained 9.00% and is currently trading just below its recent 52-week highs.
The chart below shows a performance comparison between the two Vanguard REIT ETFs and how sharp the strength in international has been since bottoming in January.
The SPDR Dow Jones International Real Estate ETF (RWX) is another well-known real estate ETF providing diversified exposure in both foreign developed and emerging market nations. RWX has $5.2 billion in total assets and tracks a narrower field of 123 overseas REITs. Despite the differences in underlying exposure to VNQI, this ETF has provided confirmation of consistent international strength across the field of global REITs.
The obvious conclusion from this evidence is that the momentum in REITs is now firmly concentrated in securities traded outside the United States. This dovetails with the predictable interest rate tightening in the U.S. versus an emphasis on quantitative easing efforts abroad. In addition, international stocks continue to notch new relative highs when compared to U.S. equities that have been mired in a sideways trading range all year.
Income investors that are concerned about rising U.S. Treasury yields may want to consider pairing back their REIT exposure or diversifying overseas depending on their risk tolerance and objectives. It’s worth noting that international investing carries its own unique risks that include currency impact and non-correlated returns. Noting your portfolios correlation to interest rates will be imperative to determining your course of action along with goals for income and capital preservation.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
