WisdomTree, the company famous for its dividend-weighted exchange-traded funds (ETFs), has joined the rush of ETF companies moving into the international real estate market.
The company launched a new ETF on the American Stock Exchange (AMEX) on June 5 tied to an index of dividend-yielding real estate companies around the world. The WisdomTree International Real Estate Fund (AMEX: DRW) holds companies in Europe, Japan, Hong Kong, Singapore, Australia and New Zealand.
The fund currently yields 3.26%, and charges 0.58% in annual expenses. It holds 224 companies, which are weighted based on regular cash dividends.
DRW is the second international real estate ETF to launch recently, joining the SPDR DJ Wilshire International Real Estate ETF (AMEX: RWX), which launched in December 2006 and has gathered nearly $1 billion in assets.
Investors have been attracted to these ETFs as the U.S. real estate market has faltered, looking for ways to maintain the benefits of real estate exposure while avoiding the bursting of the U.S. real estate bubble. Strong performance for international markets hasn’t hurt.
The two new ETFs provide similar exposure, but do have substantial differences.
Comparing RWX And DRW
The first place anyone starts when comparing ETFs is performance, and here, it’s a mixed bag. For the 10 years ending March 31, 2007, the performance differential for the underlying indexes looks like this.
|Dow Jones Wilshire ex-US RESI (for RWX)||43.4%||31.3%||12.8%|
|WisdomTree International Real Estate (for DRW)||42.6%||30.7%||14.7%|
It’s worth noting that these returns are backtested, and do not reflect fees for the ETFs. But because the two ETFs have similar fees – 0.60% for RWX and 0.58% for DRW – the real-time returns should have been similar.
The EAFE index return is included for reference.
Risk And Index Methodology
The primary difference between the two underlying indexes is that the Dow Jones index (underlying RWX) uses a traditional, market-cap-weighted methodology, while the WisdomTree index (underlying DRW) weights stocks by dividends. In most equity strategies, WisdomTree’s dividend-weighting methodology lowers the overall risk of the fund. But here, the opposite is true. According to WisdomTree, the 10-year standard deviation for DRW’s index is over 23%, versus just 16% for the index underlying RWX. In this market, where all indexes automatically screen for yield, the dividend-weighting methodology seems to increase risk.
That increased risk, however, seems to stem from the earliest years of the index, based on this calendar year comparison.
|Dow Jones (RWX)||48.6%||15.0%||44.4%||46.1%||4.5%||-4.5%||4.6%||7.8%||-10.1%|
The conclusion drawn from this table is that, as the international real estate market has matured, these two indexes have become increasingly similar.
Similar, however, is not the same as the same. The table below compares the key statistics for the two indexes, showing the WisdomTree index with a higher yield and a bit of a value tilt compared with the Dow Jones benchmark.
|Dow Jones (RWX)||WisdomTree (DRW)|
|Number of Components||144||224|
Source: WisdomTree and SSgA. Data as of 3/31/07.
Surprisingly, DRW is also slightly tilted toward large caps compared with RWX, although exact comparable data is not available.
The biggest difference between the two funds lies in the country exposure. While both focus on similar markets, the WisdomTree weighting methodology causes it to emphasize certain markets at the expense of others. The chart below compares the weights in each country.[LLB1]
|Country||Dow Jones (RWX)||WisdomTree (DRW)||Difference|
This is the biggest difference between the two funds. For RWX, you are placing increased bets on Japan, the U.K., Canada, the Netherlands and Austria. For DRW, you are placing increased bets on Australia, Hong Kong and Singapore.
The differences between the indexes underlying these two ETFs have narrowed in recent years, as shown by the annual (as opposed to annualized) performance. Nonetheless, significant differences remain – key among them the country discrepancies. Although it’s hard to generalize, RWX has far more exposure to the West (Europe and Canada) at 47.9% than DRW does (at 24.3%). RWX’s double exposure to Japan seems significant too, as that market appears to march to a different drummer than the rest of the world.
With a six-month head start, RWX looks to be the giant in this field. But DRW is a viable competitor, and should be able to attract some assets as well.