A Gem Among Real Estate ETFs

Perhaps due to the backdrop of two interest rate hikes by the Federal Reserve with plans for another before the end of 2017, the real estate sector and the corresponding exchange-traded funds are struggling this year.

Several of the largest U.S.-focused real estate investment trust ETFs are clinging to year-to-date gains of 1 percent or loss. However, investors have been rewarded by venturing outside the U.S. in search of real estate ETFs. The WisdomTree Global ex-U.S. Real Estate Fund DRW is shaming other real estate ETFs with year-to-date gain of more than 20 percent.

DRW tracks the WisdomTree Global ex-U.S. Real Estate Index, which holds ex-U.S. real estate companies with market values of more than $1 billion. The benchmark is employs a fundamental weighting methodology that focuses on cash dividends paid by member firms.

Geography Matters

DRW, which is more than a decade old, features exposure to 32 countries, about a third of which are classified as emerging markets. Hong Kong, Australia, Singapore and China are the ETF's top four country allocations, combining for about 56 percent of its weight.

“While all the indexes included exposure to Hong Kong, only the WisdomTree and S&P indexes had exposure directly to China, and WisdomTree had approximately twice the weight,” said WisdomTree in a recent note. “For WisdomTree’s approach, the China real estate stocks were up more than 100% over the period. On the opposite end of the spectrum was Japan, one of the worst-performing real estate markets in 2017.” 

Japan, Asia's second-largest economy behind China, is merely the sixth-largest country exposure in DRW at 6.7 percent. DRW's index sports a dividend yield of 4.1 percent, which is in line with some U.S. rivals. However, the benchmark's price-to-earnings ratio of 13.1 implies a discount to U.S. real estate investments.

Impressive Track Record

With DRW having turned 10 years old in June, the ETF has an ample track record to judge. Notably, its out-performance of US-focused rivals this year is not an anomaly or a one-off occurrence.

“The persistence of WisdomTree’s outperformance extends beyond 2017, and it was particularly evident on the three-year horizon,” said WisdomTree. “It was again the under-weight to Japan that was the most important factor, as Japan’s real estate has been challenged over that period as well. It’s also worthwhile to see the contrast with the two widely followed U.S. real estate indexes, beginning to lag the non-U.S. indexes over the one-year horizon but still looking strong for the periods beyond one year. Maybe this portends a shift to non-U.S. real estate outperformance.”

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