The story of exchange traded funds holding real estate investment trusts (REITs) has been a positive one this year with that positivity aided in large part by declining 10-year Treasury yields.
That ebullience has carried over to international REIT ETFs as well, including the $134.9 million WisdomTree Global ex-US Real Estate Fund (NYSEArca: DRW). With a stout distribution yield of 4.74%, DRW has surged almost 12% this year and there is reason to believe the ETF has a credible chance of running another 8.5% back to its two-year high.
Low interest rates throughout the developed world have also buoyed international REIT ETFs, but not every developed market is taking the Federal Reserve or Bank of Japan approach to rates. For example, it is all but assured the Bank of England will soon raise rates and the specter of higher U.K. rates has already weighed on some international REIT ETFs with significant U.K. exposure. [Low Rates Lift Global REIT ETFs]
The U.K. is DRW’s sixth-largest country allocation, but at a weight of just 6.6%. That is barely more than a quarter of the weight the ETF allocates to Hong Kong and less than half the weight assigned to Australia.
DRW is not a cap-weighted ETF. The fund tracks the fundamentally-weighted Global ex-US Real Estate Index (WTGRE), which weighs components on the basis on the basis of annual cash dividends paid, a logical way of weighting an ETF that tracks an income-generating asset class.
DRW’s holdings are inexpensive compared to U.S. REITs. By some estimates, U.S. REITs trade at a valuation that is 20% above the average funds from operations, a metric for valuing REITs, of the past 20 years. Investors have piled into REITs this year as an attractive income alternative in response to the falling yields in benchmark 10-year Treasury notes, contributing to the elevated valuations. [REIT ETFs Look Expensive]
Conversely, DRW’s underlying index trades at just 10 times earnings and at a book value below one. Other large country weights in the ETF include over 10% each to Singapore and France and almost 9% to Canada.
However, how Australia impacts DRW affects DRW over the medium-term is an issue to watch. The world’s twelfth-largest economy is expect to post the third-highest economic growth rate among developed markets this year and the Reserve Bank of Australia is has warned about an overheating property market there.
It is not a foregone conclusion, but it is possible that the RBA reverses course and sends rates higher. Even if that happens, DRW has enough exposure to low rate countries to endure. [Australia ETFs Can Survive a Rate Hike]
WisdomTree Global ex-US Real Estate Fund