One factoid highlights just how sensitive real estate investment trusts (REITs) and REIT ETFs are to rising interest rates. In the past month as yields on 10-year U.S. Treasuries have spiked, REIT ETFs have tumbled. Of the 16 worst-performing non-leveraged ETFs over the past month, nine are REIT funds.
That list includes well-known U.S.-focused funds such as the SPDR Dow Jones REIT ETF (NYSEArca: RWR) and the iShares Residential Real Estate Capped ETF (NYSEArca: REZ). In the past month, RWR has tumbled 12.6% while REZ has slid 13.5%. Rising rates have turned previously bullish performances for scores of REIT ETFs into year-to-date losses for these funds. [Higher Rates Push REIT ETFs Into Red For 2013]
The iShares International Developed Property ETF (NYSEArca: WPS) is one REIT that is proving somewhat durable, or at least less bad than its rivals. WPS is off 2.2% in the past month, a performance that is nothing to brag about, but one that underscores the notion that U.S. REIT funds are more vulnerable to rising interest rates than their international counterparts. [ETF Chart of the Day: Global Real Estate]
WPS, which has $172.6 million in assets under management and trailing 12-month yield of 5.62%, features scant exposure to U.S.-based REITs. Japan, Hong Kong and Australia combine for 60% of the fund’s country weight. The U.K. and Singapore round out the top-five country exposures.
Japanese stocks have struggled recently due to a strengthening yen, but WPS offers utility as a play on rebounding European equities as 12 countries from that continent are represented in the ETF. That list includes several with AAA credit ratings, including Germany, Switzerland and Sweden. [GDP Report Could Spark Europe ETFs]
Investors perceive REITs as being risky investment when U.S. rates rise because that means more cash will have to be allocated to debt servicing and perhaps diverted away from dividends, the primary reason investors embrace REITs as an asset class. The Asia-Pacific exposure offered by WPS could also be a plus for the fund going forward.
“In Asia, improving economic conditions are bolstering the property markets. In Japan, the office market is showing initial signs of a recovery in rents and vacancy rates after a prolonged downturn. Liquidity remains abundant in other developed economies such as Singapore and Hong Kong,” said AllianceBernstein earlier this year.
Japan, Hong Kong and Singapore combine for over 55% of the country weight in WPS. As an international fund, WPS is more volatile than some of its U.S.-focused peers. WPS has a three-year standard deviation 18.85%, which is more 380 basis points higher than what is found on REZ. However, WPS features a trailing 12-month yield that tops that found on REZ by 245 basis points
iShares International Developed Property ETF
ETF Trends editorial team contributed to this post.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.