Real estate investment trusts (REITs) have been one of this year’s hottest asset classes. When it comes to U.S. REITs and the corresponding exchange-traded funds (ETFs), three primary catalysts have been lifting domestic REITs this year.
First, REITs and REIT ETFs are sensitive to changes in Federal Reserve monetary policy. So, with the Fed extending its lower for longer policy, rate-sensitive asset classes, such as REITs, benefit from low interest. Second, and on a related note, still low by historical standards, yields on U.S. government debt are pushing income investors to expand their yield-seeking horizons. That scenario has been a boon for REITs and REIT ETFs.
Third, there was the anticipation of real estate stocks becoming the eleventh S&P 500 sector. That announcement was made by index providers MSCI and Standard & Poor’s nearly two years ago and the transition became official earlier this month. As a result, some market observers speculated that active fund managers that benchmark to MSCI and S&P indexes would need to gobble up REIT equities to move their funds more in line with the indexes they attempt to top.
Bottom line: REITs and REIT ETFs have had the wind at their backs this year. REIT ETFs even got a reprieve earlier this month when the Fed again opted against boosting interest rates.
However, a case can be made that most, if not all of the good news is already baked into U.S. REIT equities and U.S. REIT ETFs. With the Fed looking poised to raise rates in December, international REIT ETFs could be worth a look. Here are a few international REITs to consider.
International REITs to Consider: Tierra XP Latin America Real Estate ETF (LARE)
Expense Ratio: 0.79% per year, or $79 on a $10,000 investment.
Among international REITs, the Tierra XP Latin America Real Estate ETF (NYSEARCA:LARE) is still somewhat overlooked, which is perhaps a symptom of this ETF being less than a year old. LARE, which debuted in December, follows the Solactive Latin America Real Estate Index. That benchmark “is comprised of 58 locally-listed equities ranked overall by market capitalization, dividend yield and liquidity,” according to Tierra Funds.
While LARE is overlooked relative to other international REIT ETFs, that condition should not last much longer. Year-to-date, LARE is up more than 23%, which is more than double the returns offered by the Vanguard REIT ETF (NYSEARCA:VNQ), the largest REIT ETF.
Although LARE is a regional REIT ETF, a combined 96% of its weight is allocated to Brazilian and Mexican REITs. In terms of year-to-date volatility, LARE compares favorably with ETFs such as the iShares Latin America 40 ETF (NYSEARCA:ILF) and the iShares MSCI Brazil Capped ETF (NYSEARCA:EWZ).
Using the same interest rate logic that is applied to U.S. REITs makes LARE that much more enticing because if Brazil, which is home to some of the world’s highest interest rates at 14.25%, cuts those rates next year, Brazilian REITs should surge.
International REITs to Consider: iShares International Developed Real Estate ETF (IFGL)
Expense Ratio: 0.48%
Although it has lagged its U.S. rivals, the iShares International Developed Real Estate ETF (NASDAQ:IFGL) has been solid among international REITs with a year-to-date gain of almost 7.5%. For investors considering international bonds for portfolio diversity or added yield, IFGL could be a credible alternative.
Remember that the developed is awash in about $10 trillion in negative-yielding sovereign debt, meaning investors that hold those bonds will likely lose money. Conversely, IFGL has a trailing 12-month dividend yield of just under 3%, according to issuer data. Plus, this international REIT ETF’s three-year standard deviation of 12.5% is low compared to some other international equity investments.
As for being levered to the monetary easing theme, IFGL offers that exposure as well. Japanese and Eurozone REITs combine for nearly 40% of the ETF’s weight and those are two regions with negative interest rates that could add to stimulus efforts in the coming months.
Additionally, Australia, which has been rampantly lowering interest rates for several years, is IFGL’s third-largest geographic allocation at just under 13%.
International REITs to Consider: Vanguard Global ex-US Real Estate ETF (VNQI)
Expense Ratio: 0.18%
The aforementioned VNQ is a giant among U.S. REIT ETFs. Fortunately for Vanguard investors, VNQ has an international stablemate in the form of the Vanguard Global ex-US Real Estate ETF (NASDAQ:VNQI). In keeping with Vanguard’s low cost tradition, the expense ratio of 0.18% on this international REIT ETF is lower than 86% of rival funds, according to issuer data.
As with many Vanguard ETFs, VNQI holds a deep basket of stock, as this international REIT ETF is home to nearly 670 holdings. Potential investors should also note that VNQI is not a dedicated developed markets ETF, as emerging economies represent 18.4% of the ETF’s geographic lineup.
VNQI’s geographic lineup is somewhat similar to IFGL’s with Japan, Hong Kong and Australia combining for 44.5% of the Vanguard fund’s weight, indicating investors should not own these two international REIT ETFs at the same time in order to avoid geographic concentration risk.
VNQI yields almost 2.9%. Over the last three years, VNQI has displayed comparable volatility to VNQ, but the domestic REIT ETF has outpaced the international REIT ETF by an almost 5-to-1 margin.
At the time of this writing, Todd Shriber owned shares of VNQ.