State Street bringing fund designed to combine two Dow Jones indexes at lower costs than two current rivals.
The trend is clearly going global in exchange-traded funds focusing on real estate investment trusts.
A third global REIT ETF is set to launch on Tuesday, according to State Street Global Advisors. The firm says it's ready for shares of the SPDR DJ Wilshire Global Real Estate ETF (AMEX: RWO) to begin trading. It'll come with an expense ratio expected to land at 0.50%, which would undercut its two closest competitors on the market. (See related story.)
RWO's index includes more than 240 commercial and residential real estate companies domiciled in 23 countries across the globe, including the U.S. That rivals the 300-plus stocks held by The First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund (AMEX: FFR). It's also far more than just-launched Cohen & Steers Global Realty Majors ETF (AMEX: GRI) and its 75-odd names.
SSgA also plans to come out on Tuesday with the SPDR S&P International Mid Cap ETF (AMEX: MDD). It's built to track an index with more than 850 companies with market caps between $2 billion and $5 billion from 25 development markets outside the U.S. It will carry an annual expense ratio of 0.45% and provide U.S. investors with another tool to fine-tune their international allocations.
But with real estate such a hot sector the past seven-plus years, a range of international-minded REIT funds have been cropping up. But only since last August have global REITs come onto the scene, providing one-stop shopping with a somewhat higher price tag.
"Those investors looking at global real estate are benefiting from the fact that the property markets are in different stages. We're seeing a lot of diversification benefits coming from spreading risks across different markets around the world," said Amos Rogers, manager of RWO.
Currently, about 33 different countries have some form of legislation allowing REIT structures. Going back to the early ‘90s, there were only three - the U.S., the Netherlands and Belgium.
RWO will combine indexes of two other SSgA funds. Those are the Dow Jones Wilshire REIT ETF (AMEX: RWR) and the SPDR Dow Jones Wilshire International Real Estate ETF (AMEX: RWX). Rogers manages those portfolios as well.
On a worldwide basis, the U.S. now makes up about 40% of the REIT marketplace, says Rogers. But he adds that growth in REIT firms in Europe and Asia Pacific has been booming. In particular, Rogers points to Hong Kong as being especially active with its close ties to rapidly growing China.
"Asia and emerging markets are in an earlier growth stage. They're still expanding and their property infrastructure is still growing. In western regions such as the U.S. and Europe, we're in a more mature part of the cycle," Rogers said.
In the U.S., most of the publicly traded REITs have tended to specialize. "When you look more globally, they're more diversified. They tend to be real estate companies that invest in multiple sectors," said Rogers.
In the combined global format for RWO, some 78% of its index is REITs. The other 22% are real estate operating companies.
RWO will include the following sector allocations for the pure REITs portion of its portfolio: regional malls (16.5%); office (11.2%); industrial (10%); residential apartments (7.5%); health care (4.2%) and hotels (3%).
Besides the U.S. at 42.8%, RWO will have country allocations including: Australia (10.3%); Japan (10%); U.K. (8.8%); France (5.5%); Hong Kong (5.2%); Singapore (4.2%); Canada (2.9%) and Austria (2.2%).
REITs are structured as a unique ownership vehicle. They were created in the U.S. in the 1960s as a way for individuals to make relatively small investments in real estate. Since real estate is usually held in partnerships and doesn't pay taxes at the corporate level, REITs don't pay taxes, but must distribute 90% of their income as a dividend to investors. So they've got to pass through their income much like limited partnerships that directly hold real estate.
Real estate operating companies are more like holding traditional stock companies. "While the U.S. real estate market is almost totally REITs, when you go outside the U.S., it's about a 50-50 split," Rogers said.