This year’s tumble in 10-year Treasury yields has served as the catalyst for stellar performances by and substantial inflows U.S.-focused exchange traded funds tracking real estate investment trusts (REITs), such as the Vanguard REIT ETF (NYSEArca: VNQ) and the iShares U.S. Real Estate ETF (NYSEArca: IYR).
Low interest rates throughout the developed world have also buoyed international REIT ETFs, which have delivered impressive performances of their own. The Vanguard Global ex-U.S. Real Estate ETF (NYSEArca: VNQI), the global equivalent of the popular VNQ, is up 10.1% over the past three months. So is the iShares International Developed Real Estate ETF (NasdaqGM: IFGL). [Play the Real Estate Recovery With These ETFs]
The $4.7 billion SPDR Dow Jones International Real Estate ETF (NYSEArca: RWX) has added about 9% over the same time, but the medium-term outlook for these ETFs and rival funds could be muted a bit due to speculation of higher interest rates in some developed markets.
In the case of the U.K., higher rates and soon appear to be a lock as the Bank of England looks poised to join the Reserve Bank of New Zealand in the developed market rate hike club. The U.K. receives an average weight of 11.7% in IFGL, RWX and VNQI. [Sterling ETF Rallies on BoE Rate Hike Bets]
The wildcard is Australia. The Reserve Bank of Australia has been one of the most strident rate cutters among developed market central banks over the past several years, but more rapid-than-expected economic growth in the world’s 12th-largest economy could force RBA to sing a different tune. [Might be Time to Discuss Higher Aussie Rates]
Australia is expected to show the third-fastest GDP growth among developed markets this year. Perhaps not coincidentally, New Zealand and the U.K. are one and two on that list. Australia accounts for an average of 12.7% of the aforementioned international REIT ETFs.
Those are the elements to consider with these ETFs, but there is still upside potential with these ETFs. Japan and the Eurozone tell that story.
Rates in Japan and the Eurozone are low and expected to remain that way. It is entirely possible the Federal Reserve raises rates before the European Central Bank or the Bank of Japan. Japan, the world’s third-largest economy, is the largest country weight in IFGL, RWX and VNQI at an average allocation of 24.2%.
Additionally, these ETFs do not skimp on Eurozone exposure. For example, six of the 18 countries represented in RWX are Eurozone nations and combine for 16% of the ETF’s weight, according to State Street data.
Vanguard Global ex-U.S. Real Estate ETF