Going Global With Real Estate ETFs

Domestic real estate stocks and related exchange traded funds are struggling this year. For example, the Vanguard Real Estate ETF VNQ, the largest fund in this category and the largest sector ETF of any stripe, is lower by more than 6 percent year-to-date.

Global real estate funds have been significantly better. Just look at the FlexShares Global Quality Real Estate Index Fund GQRE, which sports only a modest year-to-date loss.

GQRE, which debuted in November 2013, tracks the Northern Trust Global Quality Real Estate Index and has $264.59 million in assets under management.

What Happened

The Federal Reserve boosted interest rates three times last year. One rate hike has been delivered so far in 2018, and some market observers believe that number could rise to four before the end of the year — but higher rates do not always have to punish real estate investments. In fact, the time could be right to consider GQRE.

“Traditionally, real estate has been used as a long-term inflation hedge along with common stocks,” according to FlexShares research. “One reason is that certain types of real estate have been shown to be less resistant to interest rates in a rising rates environment.”

Why It's Important

The U.S. accounts for nearly half of GQRE's geographic weight. While that may seem like a hindrance at a time when several more rate hikes could be coming, GQRE balances out its domestic rate risk. The ETF features exposure to nine other countries, at least seven of which are unlikely to raise interest rates this year.

GQRE's underlying index uses a “multifactor approach that examines quality as a standalone factor, but adds value and momentum scores in a rules-based, quantitative process to build a targeted index,” according to FlexShares.

What's Next

GQRE could be uniquely positioned to withstand a rising rate environment in the U.S. due to its focus on quality real estate investment trusts. The quality can be a sign that GQRE member firms are financially sound with the ability to continue raising dividends even as borrowing costs climb.

“Quality companies have more than enough cash on hand to meet their debt obligations and day-to-day liquidity needs,” said FlexShares.

Additionally, GQRE's value tilt positions the fund to benefit if the value factor starts rebounding. GQRE yields just over 2 percent.

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Todd Shriber owns shares of VNQ.