Investors have turned to alternative avenues of income, like real estate investment trusts, in their search for income. Those who wish to allocate toward REITs should also consider a exchange traded funds that provide global exposure as a significant portion of the opportunity set lies outside our borders.
“Global real estate offers unique features and fundamental diversification driven by local supply/demand dynamics, which can make it a useful component of a global stock and bond portfolio,” Fidelity Investments strategists, led by Steve Buller, said in a research note.
The international REITs category is often overlooked as investors search for yield. At the end of June 2016, the level of assets in U.S.-domiciled funds focused on U.S. real estate was four times that of global real estate funds and eight times that of funds focused on international REITs. However, North America only represents half the global real estate opportunity set.
“Maintaining a home-country bias may obscure the potential benefits that global real estate can offer, including diversifying an allocation to U.S. real estate, diversifying a global stock and bond portfolio, and taking advantage of long-term real estate growth opportunities abroad,” according to Fidelity.
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International REITs may offer diversification benefits as individual property sectors behave differently from one country to another due to different economic and local circumstances. Fidelity found that international real estate has generally demonstrated imperfect correlation relative to U.S. real estate over time, which has led to lower volatility and potentially greater risk-adjusted returns.
Fidelity pointed out that global real estate has shown imperfect correlation to global equities and relatively low correlation to global bonds, which may help investors further diversify away from traditional equity and fixed-income positions.