Global Real Estate ETFs Head-To-Head (GRI, RWO)

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September 18, 2012 2:48pm NYSE:GRI NYSE:RWO

Eric Dutram: Gone are the days of the 2008 housing bubble burst which shook the foundations of the global economy. Since then, a number of stimulus packages from central banks across the globe have helped stimulate economic recovery and rekindle some hope

in the real estate sector as well.

Real estate has been an interesting investment option for investors this year from a domestic U.S point of view. This can be mainly attributed to a gradual recovery in the overall U.S economy which has gone a long way in strengthening commercial as well as residential real estate fundamentals (see The Introductory Guide to Real Estate ETF Investing).

This also includes the current low interest rate environment and moderate levels of economic growth have helped stimulate real estate demand. All these factors have helped to increase the revenues as well as profitability (return on equity) of companies from the real estate industry.

Additionally from a dividend yield perspective, at present the income starved investors have shown greater interest in this exciting slice of the market, as the industry has a good track record of dividend payments (see Zacks #1 Ranked Dividend ETF: VIG).

A look at the industry from a global perspective also reflects positive trends. A series of favorable news from across the Atlantic has gone a long way in reducing pessimism from the global equity markets and especially in the case of the troubled euro zone.

Also, economies from the Asia-Pacific as well as Latin American regions are full of opportunities for investors from the perspective of the real estate industry. Adding to the real estate flavor in these economies is their vast domestic markets, mainly thanks to the growing population of Asia-Pacific and Latin America, and relatively better economic conditions.

Therefore, from a global perspective, the real estate industry can be considered an attractive proposition, given its recent solid performance, high dividend yields and high levels of correlation with the broader economic conditions, which (for most economies) still have a vast room for improvement.

For investors seeking a basket exposure to global real estate companies, we have analyzed and highlighted two products that have performed well this year. The SPDR Dow Jones Global Real Estate (NYSEARCA:RWO) and Cohen & Steers Global Realty Majors ETF (NYSEARCA:GRI) are the two highlighted ETFs from the global real estate space that have handsomely beaten the S&P 500 on a year–to-date basis.

RWO tracks the Dow Jones Global Select Real Estate Securities Index. The index is a market capitalization index adjusted for float which tracks the performance of real estate stocks from the emerging markets.

On the other hand, GRI tracks the Cohen & Steers Global Realty Majors Index, which in turn tracks the performance of those companies which are the market leaders in real estate securitization (see Is it Time to Buy Build America Bond ETFs?).

The former is up 17.70% whereas the latter has returned 18.30% on a year-to-date basis as of the end of August 2012. In the same time period, the S&P 500 is up only by around 10%. Both these ETFs have a very strong price correlation of 0.99 between each other. This implies that the two products have moved in the same direction with similar magnitude, almost all the time.

This might be a helpful assertion for investors looking for a pair trade on these two Global real estate ETFs as the trend line drawn on the ratio of its prices is almost flat, confirming mean reversion. Nevertheless, in terms of popularity and coverage, RWO has an upper hand. RWO has an asset base of $516 million, compared to just $68.45 million for GRI (see more in the Zacks ETF Center).

This might be considered a startling difference especially considering the fact that both these products were launched in the same time period (May 2008). Also, there is a vast difference when it comes to their average daily volume. With 8,000 shares of GRI exchanging hands each day, it lags behind 90,000 shares for RWO.

In terms of expenses structure, RWO charges investors 0.50%, whereas GRI is a bit more expensive charging 55 basis points. Also, RWO has a superior dividend yield of 2.93% compared to the GRI yield of 2.05%. RWO has a very well diversified portfolio of 212 securities; whereas GRI holds only 75 securities (read Is ROOF a Better Real Estate ETF?).

Also, both these ETFs are heavily exposed towards investments in the U.S. GRI accounts for almost 47% of its total assets as being invested in the U.S. whereas RWO has a 55% domestic U.S exposure. However, RWO is more exposed to mid and small cap companies accounting for 66% of its total assets, on the other hand GRI places its bets more on large cap stocks (around 71%).

RWO has a high R-Squared value of 78% against the S&P 500 on a three year basis. Such a high correlation with the U.S. equity market can be explained by a high allocation towards U.S stocks.

However, its counterpart GRI has an R-Squared value of only 57% for the same time period. Therefore, investors looking to play on diversification might want to consider GRI over RWO although either could be great choices in order to play a return to strength in the real estate market.

Written By Eric Dutram From Zacks Investment Research  

In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.

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