woes?

ETF INVESTING
New ETFs capture foreign real estate stocks
As U.S. market sputters, trio of funds invest in overseas land developers
By John Spence, MarketWatch
Last Update: 3:27 PM ET Aug 19, 2007
BOSTON (MarketWatch) -- Now that U.S. commercial real estate stocks
have followed the residential housing market into the gutter as
mortgage woes spread, more investors are looking to put overseas
properties in their portfolios.
Investors are getting help in pursuing international realty stocks
from a trio of low-cost, diversified exchange-traded funds. The
increasing number of options comes as institutional investors such as
pension funds have been ratcheting up exposure to commercial real
estate and are increasingly searching overseas to further diversify
their stock and bond portfolios.

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But the ETFs are not without risk, as the credit crunch is making its
presence felt around the globe. Real estate stocks worldwide may
endure heightened volatility as investors struggle to grasp the extent
of the damage in the mortgage market.
One of the easiest ways to participate in the market is through real
estate investment trusts, or REITs. These publicly traded companies,
which were established by the U.S. government in the 1960s, own and
operate commercial real estate properties such as apartments, offices
and warehouses. They are required to pay out 90% of their taxable net
income to shareholders in the form of dividends.
So-called equity REITs manage income-producing real estate, while
mortgage REITs, which have come under fire recently due to problems
rippling out from the subprime sector, lend money and collect the
interest payments.
Heading into 2007, U.S.-based REITs had outperformed the stock market
for seven years running. But the sector has suffered a sharp pullback
so far this year and the feverish pace of merger-and-acquisition
activity has slowed. Through Aug. 17, the Dow Jones Wilshire REIT ETF
(RWRDJ Wilshire REIT ETF
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RWR) was down 13.3% and was lagging the S&P 500 Index (SPXS&P 500 Index
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SPX) by 14 percentage points, according to investment researcher
Morningstar Inc.
The SPDR Dow Jones Wilshire International Real Estate ETF (RWXSPDR DJ
Wilshire International Real Estate ETF
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RWX) had been holding up relatively well until liquidity fears really
started to shake markets last week. It was off 9.9% year to date
through Aug. 17. State Street Global Advisors launched this first ETF
tracking foreign real-estate stocks in December 2006, and it has
gotten a warm reception, recently breaking through $1 billion in
assets.
The ETF, which has an expense ratio of 0.6%, recently got some competition.
On June 5, WisdomTree Investments Inc. (WSDTwisdomtree invts inc com
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WSDT) listed WisdomTree International Real Estate Fund (DRWwisdomtree
trust intl real est
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DRW) on the American Stock Exchange, with fees of 0.58%. And earlier
this month, Barclays Global Investors got into the game with iShares
S&P World ex-U.S. Property Index Fund (WPSishares trust s&p wld ex-us
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WPS) , which levies 0.48% and trades on the New York Stock Exchange.
The ETFs run by Barclays and State Street weight companies by market
capitalization, while the WisdomTree offering takes a different tack
by weighting stocks by their dividend yields.
Australia, Hong Kong, Japan and the U.K. tend to be among the largest
country allocations for all three ETFs. Top holdings include companies
such as Westfield Group (AU:WDC: news, chart, profile) ,
Unibail-Rodamco (FR:012471: news, chart, profile) and Land Securities
(UK:LAND: news, chart, profile) .
The case for international real estate
Institutional investors like investing in commercial real estate for
the income and noncorrelation benefits, since the asset class tends to
behave differently than stocks and fixed-income investments. To
diversify even further, they're looking to foreign shores.
"U.S. investors have started to appreciate the size of the
international real estate market," said Amos Rogers, managing director
of Boston-based Tuckerman Group, which is a real estate investment
advisory firm and member of State Street Global Alliance LLC.
"The primary driver is investors seeing the low correlations and
diversification benefits," he said. A cornerstone of portfolio
management is that investments that zig when others tend to zag can
reduce overall risk.
Additionally, investors are concerned about valuations in U.S.
real-estate stocks after years of outperformance, Rogers said. "Some
international markets are just starting to grow, and there are better
values perceived to be had overseas," he added.
The size of the international REIT market has grown in recent years as
more countries have adopted the U.S. structure, which provides better
transparency and reporting standards. "I believe REITs will become the
predominant vehicle for publicly traded real estate in the future,"
Rogers said.
However, the ETFs invest in publicly traded real estate management and
development companies that don't have the REIT structure.
May be bumps
"We like international real estate stocks because the valuations are
better," said Marc Rappaport, senior managing director at Alpine Woods
Capital Investors LLC.
Still, he said the current credit shake-up could lead to bumps for
real estate stocks around the globe. "Companies can be very strong,
but you're thrown into market psychology, which is driven by fear and
greed," Rappaport said.
Fears in the mortgage markets have spilled over to affect financials
and real estate companies. "It's something to keep an eye on, and we
take it seriously," he said.
Bruce Lavine, chief operating officer at WisdomTree, said the New
York-based firm heard strong demand for international real estate
ETFs.
"There are not a lot of options or alternatives for international real
estate for the investor on the street," he said. "Investors have had a
good run with domestic real estate, but now the international market
is looking cheap relative to the U.S."
These days, about half of the companies that are classified as REITs
reside outside the U.S., according to Jane Leung, a portfolio manager
at Barclays Global Investors.
"As we continue to see increased interest in international investing,
there will be more products like this," she said. The new ETF "can be
an excellent investment for those who want to broaden exposure to
international real estate markets and REITs," Leung said, adding that
it can also provide another source of yield as well as capital
appreciation.