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.