International REIT

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delrinson
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International REIT

Post by delrinson » Mon May 08, 2017 4:53 pm

I recently diversified my portfolio by selling some of my BND and adding two REIT ETFs: VNQ and WPS, split 50/50. My REIT ETFs currently represent 6.6% of my portfolio, an allocation with which I am perfectly comfortable.

But I find myself wondering whether I should have gone with VNQI instead of WPS. Expense ratio is lower...and I am partial to Vanguard. I went with WPS and the 50/50 split based on the recommendation of a respected Boglehead.

Perhaps it doesn't matter and that either is a good choice. Anyone have strong opinions one way or the other?
Last edited by delrinson on Mon May 08, 2017 6:09 pm, edited 1 time in total.

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Re: International REIT

Post by nisiprius » Mon May 08, 2017 5:23 pm

delrinson wrote:I recently diversified my portfolio by selling some of my BND at adding two REIT ETFs: VNQ and WPS, split 50/50. My REIT ETFs currently represent 6.6% of my portfolio, an allocation with which I am perfectly comfortable.

But I find myself wondering whether I should have gone with VNQI instead of WPS. Expense ratio is lower...and I am partial to Vanguard. I went with WPS and the 50/50 split based on the recommendation of a respected Boglehead.

Perhaps it doesn't matter a lot one way or the other. Anyone have strong opinions one way or the other?
It's best to give the full name of any ETF or mutual fund the first time you mention it in a posting. I know VNQ but I had to look the others up.

VNQ: Vanguard REIT Index Fund, tracks MSCI US REIT Index
VNQI: Vanguard Global ex-U.S. Real Estate ETF, tracks S&P Global ex-U.S. Property Index
WPS: iShares International Developed Property ETF, tracks S&P Developed ex-U.S. Property Index S&P Developed ex-U.S. Property Index, corrected, :oops:
Last edited by nisiprius on Mon May 08, 2017 5:40 pm, edited 2 times in total.
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iceport
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Re: International REIT

Post by iceport » Mon May 08, 2017 5:31 pm

delrinson wrote:I recently diversified my portfolio by selling some of my BND at adding two REIT ETFs: VNQ and WPS, split 50/50. My REIT ETFs currently represent 6.6% of my portfolio, an allocation with which I am perfectly comfortable.

But I find myself wondering whether I should have gone with VNQI instead of WPS. Expense ratio is lower...and I am partial to Vanguard. I went with WPS and the 50/50 split based on the recommendation of a respected Boglehead.

Perhaps it doesn't matter and that either is a good choice. Anyone have strong opinions one way or the other?
I would have certainly opted for Vanguard's VNQI instead of iShares WPS. Presumably, the whole purpose of splitting a real estate position between US and international is for the diversification benefit. It appears the primary difference between the two funds is that VNQI includes emerging markets (17% per M*) and WPS does not. VNQI has about 252 more holdings than WPS (672 vs. 420, again per M*). If the purpose is to diversify the real estate position, it seems to me that VNQI does a better job.

Then there is the expense ratio problem, with VNQI ER=0.15% and WPS ER=0.48%.

The only minor advantage I could see to avoiding emerging markets in the real estate position is if you are really picky about not over-weighting emerging markets. But 3.3% of 17% is a very small number, negligible in my opinion. I am not aware if there are any concerns about the company structures in emerging markets vs. developed markets.

EDIT:

Full disclosure: I split Vanguard REIT Index Fund Institutional Shares (VGSNX) with Vanguard Global ex-U.S. Real Estate Index Fund ETF Shares (VNQI) 50/50, with each representing 4% of the total portfolio. As long as I bothered to add the diversifying real estate holding, I want it to be as diversifying as possible.
Last edited by iceport on Mon May 08, 2017 5:57 pm, edited 1 time in total.
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Re: International REIT

Post by iceport » Mon May 08, 2017 5:32 pm

nisiprius wrote:VNQ: Vanguard REIT Index Fund, tracks MSCI US REIT Index
VNQI: Vanguard Global ex-U.S. Real Estate ETF, tracks S&P Global ex-U.S. Property Index
WPS: iShares International Developed Property ETF, tracks S&P Global ex-U.S. Property IndexS&P Developed ex-U.S. Property Index
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Re: International REIT

Post by nisiprius » Mon May 08, 2017 5:35 pm

Whoa. I don't know that I've ever seen anything like this before. Two index ETFs tracking the same same index with this much difference between them. (I plotted a money market fund first to force Morningstar to give total return growth charts for the ETFs. Blue, ignore).

Orange, WPS. Green, VNQI.

Source
Image

On playing around with the endpoints a bit, the difference seems to be almost entirely attributable to 4/30/2013 to 1/31/2014.

Weird.
:oops: D'oh.
Last edited by nisiprius on Mon May 08, 2017 5:38 pm, edited 1 time in total.
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Re: International REIT

Post by iceport » Mon May 08, 2017 5:38 pm

^^ They actually track different indexes. I was surprised their performance was so close.

iShares International Developed Property ETF Fact Sheet
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delrinson
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Re: International REIT

Post by delrinson » Mon May 08, 2017 5:47 pm

My apologies for the lack of clarity in the original post.

Yeah, I may have been too hasty in jumping into WPS without doing more research. I don't know that I have a strong opinion about the number of holdings or whether or not to exclude emerging markets. But the expense ratio difference is not negligible.

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Re: International REIT

Post by harvestbook » Mon May 08, 2017 7:02 pm

I'm 6 percent Vanguard US REIT and 3 percent Vanguard ex-US REIT, slowly moving to 5 and 5 percent. Not sure about the ETF version but the ex-US index fund has one-time purchase and redemption fees of 0.25 percent. Not that big a deal if you're holding for the long term, but it is a cost.

I look at it as diversity. People have to live and work somewhere no matter where they live.
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Re: International REIT

Post by iceport » Mon May 08, 2017 8:54 pm

delrinson wrote:I don't know that I have a strong opinion about the number of holdings or whether or not to exclude emerging markets. But the expense ratio difference is not negligible.
Well, as I noted above, it seems to me the added diversification of the dedicated allocation is the whole point. But speaking of costs, if you consider the added "cost" of losing the foreign tax credit (assuming you hold the fund in a tax-advantaged account, as you should) going with an ETF with a relatively high direct cost of 0.48% in combination with the indirect cost of losing the foreign tax credit, the added diversification (beyond US REITs) is costing a bit more than you might think.

The wiki says (https://www.bogleheads.org/wiki/Interna ... _portfolio) you can estimate the foreign tax credit at 5% of the dividend yield. That might be in the neighborhood of another 0.26%.
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Re: International REIT

Post by abuss368 » Mon May 08, 2017 9:42 pm

Remember that REITs are not a substitute for Bonds.
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Re: International REIT

Post by abuss368 » Mon May 08, 2017 9:42 pm

We have invested in the Vanguard International REIT fund for many years. This has worked well when combined with the U.S. REIT fund.
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Re: International REIT

Post by kramer » Mon May 08, 2017 11:16 pm

While I like VNQI and own some of it, one thing that worried me about it in the past was that some of the countries had not legislated a distinct REIT structure like the US. In the US, one of the main differentiations of REIT stocks is that they have distinct tax treatment and regulations, they are not treated as just another public corporation.

However, when I looked up data to back up my assertion, it seems that more countries have adopted the US REIT approach, as seen here:

https://www.reit.com/investing/reit-bas ... investment

It looks like all the top country holdings of VNQI have adopted a US-style REIT approach except for China. And China is considering it.

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Re: International REIT

Post by delrinson » Tue May 09, 2017 6:16 am

abuss368 wrote:Remember that REITs are not a substitute for Bonds.
Yes. My primary motivation was to diversify into REITS and I only wanted to do that in a tax-sheltered account. But I knew this would also have the effect of reducing our bond allocation to around 28%. At age 56, a bit lower than I would like. But I'm not worried about a suppressed bond allocation since I know that when we sell the house in nine years we will be able to restore allocation to wherever it needs to be.

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Re: International REIT

Post by Angst » Tue May 09, 2017 8:47 am

kramer wrote:While I like VNQI and own some of it, one thing that worried me about it in the past was that some of the countries had not legislated a distinct REIT structure like the US. In the US, one of the main differentiations of REIT stocks is that they have distinct tax treatment and regulations, they are not treated as just another public corporation.

However, when I looked up data to back up my assertion, it seems that more countries have adopted the US REIT approach, as seen here:

https://www.reit.com/investing/reit-bas ... investment

It looks like all the top country holdings of VNQI have adopted a US-style REIT approach except for China. And China is considering it.
That's interesting, thanks for posting - I didn't realize how many were following it. Here's a link to what I thought was a great graphic showing the participating countries. It's from the reit.com website you linked above.

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Re: International REIT

Post by TIAX » Tue May 09, 2017 10:48 am

kramer wrote: It looks like all the top country holdings of VNQI have adopted a US-style REIT approach except for China. And China is considering it.
Is there a reason you prefer the U.S. style REIT approach?

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Re: International REIT

Post by kramer » Tue May 09, 2017 11:04 am

TIAX wrote:
kramer wrote: It looks like all the top country holdings of VNQI have adopted a US-style REIT approach except for China. And China is considering it.
Is there a reason you prefer the U.S. style REIT approach?
Good question. US style REITs are real estate holding companies and have to distribute 90% of their profits to shareholders each year and there is no double taxation on profits, the profits pass through to the shareholders (according to my understanding). Without special laws for such companies, there is less incentive to create them. Thus, it becomes harder for one to invest in pure real estate stocks. And presumably part of the lack of correlation of REITs to non-REITs is due to the special status I described, tax-wise and otherwise.

I am guessing in a country without REIT structures, there are many more mixed companies that have real estate investments and other business trading under the same company. So it is harder to single out real estate investments in that environment.

Maybe others can chime in here as I am not an expert :D

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Re: International REIT

Post by NiceUnparticularMan » Tue May 09, 2017 11:07 am

TIAX wrote:
kramer wrote: It looks like all the top country holdings of VNQI have adopted a US-style REIT approach except for China. And China is considering it.
Is there a reason you prefer the U.S. style REIT approach?
I'm not kramer, but absent something like it, you are not necessarily going to get a decent proxy for direct holdings of real estate.

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Re: International REIT

Post by iceport » Tue May 09, 2017 12:21 pm

Data on the index construction for VNQI is available here: S&P Global Ex-U.S. Property

There are links to PDFs for a "Factsheet" and "Methodology".

From the Methodology document:
Inclusion and Exclusion Criteria

S&P Global Property Index. Below are specific industry criteria for company inclusion in the S&P Global Property Index. In particular, these companies must be engaged in real estate ownership, development and/or management.
• Lessors of buildings and dwellings
• Lessors of mini warehouses and self-storage units
• Real estate development
• Real estate property managers
• Real estate rental and leasing

The Property Index specifically excludes companies whose main source of revenue is derived from fees or interest earned when providing real estate services or financing.
• Brokers and investment management service companies
• Companies primarily engaged in the financing of real estate
• Companies solely engaged in the management of properties or facilities
• Homebuilders and companies in construction, contracting and project management services
• Real estate agents and appraisers
Note that the S&P Global Property Index does not require the REIT structures that another index, the S&P Global REIT Index, requires. VNQI tracks the S&P Global ex-U.S. Property Index.

Also:
Index Construction

The S&P Global Property index is drawn from BMI constituents specifically classified under the GICS Real Estate Industry Group. Property Index constituents derive more than 60% of their revenue from property or real estate–related activities. Specifically, more than 60% of their revenue must come from real estate development, management, rental, and/or investment, as well as companies that invest in physical assets, such as REITs and property trusts. Along with revenues, operating profit and market perception of the company are all elements that are considered in defining a property index constituent.
As far as the OP might be concerned about how good a proxy either VNQI or WPS might be for real estate ownership, it should be noted that both funds track subsets of the same S&P Global Property index, so both own the same types of companies.
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Re: International REIT

Post by NiceUnparticularMan » Tue May 09, 2017 1:16 pm

iceport wrote: Note that the S&P Global Property Index does not require the REIT structures that another index, the S&P Global REIT Index, requires. VNQI tracks the S&P Global ex-U.S. Property Index.
Bummer.

We've got 7% in a Real Return fund, of which 35% is trying to match the FTSE/EPRA Developed Liquid Index, of which about 46% is non-U.S., and it appears about 42% of that is non-REIT. So that is less than 1/2 of 1% . . . and it still irks me.

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Re: International REIT

Post by iceport » Tue May 09, 2017 3:38 pm

NiceUnparticularMan wrote:
iceport wrote: Note that the S&P Global Property Index does not require the REIT structures that another index, the S&P Global REIT Index, requires. VNQI tracks the S&P Global ex-U.S. Property Index.
Bummer.
Does it really make much of a difference? If so, how can you tell? How do you know that the inclusion/exclusion criteria don't do a decent job of building a decent proxy for direct real estate investment?

So here's a crude test.

DFA International Real Estate Securities Portfolio (DFITX) tracks the S&P Global ex US REIT Index; Vanguard Global ex-US Real Estate ETF (VNQI) tracks the S&P Global ex-U.S. Property Index

Below is a comparison chart for the last 5 years, with Vanguard Total International Stock Index Fund (VTIAX) also added for comparison. By casual inspection, it does appear that VNQI is more strongly correlated with the international stock market as a whole than DFITX is. This is interesting, but it doesn't change my plan, and I'm not terribly bothered.

Image
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Re: International REIT

Post by NiceUnparticularMan » Tue May 09, 2017 4:26 pm

iceport wrote:
NiceUnparticularMan wrote:
iceport wrote: Note that the S&P Global Property Index does not require the REIT structures that another index, the S&P Global REIT Index, requires. VNQI tracks the S&P Global ex-U.S. Property Index.
Bummer.
Does it really make much of a difference? If so, how can you tell? How do you know that the inclusion/exclusion criteria don't do a decent job of building a decent proxy for direct real estate investment?
So, I'd start with the burden of proof the other way around--if I am going to bother investing separately in these securities, I want assurances I am not just buying some random sector stocks, but that instead I am actually getting something different, and in particular a decent proxy for direct real estate investment. The legal structure of REITs gives me some such assurance, and then I know there have been studies like this one showing it basically works, with some caveats:

https://personal.vanguard.com/pdf/icreecr.pdf

There have also been studies which have found for the U.S., at least, REITs are better diversifiers (see the conclusion on Page 252):

http://pages.jh.edu/jrer/papers/pdf/pas ... 37_254.pdf

Studies in Europe have found notable differences between REITs and REOCs which are similar to the ones discussed in that U.S. paper:

http://lib.tkk.fi/Diss/2012/isbn9789526 ... 049137.pdf

It should be noted, though, that S&P argues you need to include REOCs for geographic diversification purposes:

http://us.spindices.com/documents/educa ... esting.pdf

I think if you were investing separately in U.S. and ex-U.S. REITs, however, you could avoid at least the U.S. concentration discussed in that article, and there are plenty of countries with REIT-type structures these days.

But is it possible screening has eliminated this concern? Sure, I guess. I'd like to see evidence to that effect, however.

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Re: International REIT

Post by NiceUnparticularMan » Tue May 09, 2017 4:47 pm

iceport wrote:So here's a crude test.

DFA International Real Estate Securities Portfolio (DFITX) tracks the S&P Global ex US REIT Index; Vanguard Global ex-US Real Estate ETF (VNQI) tracks the S&P Global ex-U.S. Property Index

Below is a comparison chart for the last 5 years, with Vanguard Total International Stock Index Fund (VTIAX) also added for comparison. By casual inspection, it does appear that VNQI is more strongly correlated with the international stock market as a whole than DFITX is.
Running it through Portfolio Visualizer, since 11/29/2010, DFITX has a correlation of 0.82 with VTIAX, and VNQI has a correlation of 0.91 with VTIAX.

Perhaps even more importantly (in my view), DFITX has a correlation of 0.70 with VTSMX (U.S. total stock market), and VNQI has a correlation of 0.83.

Plain old VNQ actually has a lower correlation with VTSMX in this period--0.75. VTIAX has a correlation of 0.88.

OK, so if you rank them by correlation with U.S. TSM, most to least, you get:

Total International 0.88
Global ex-US Property 0.83
U.S. REIT 0.75
Global ex-U.S. REIT 0.70

Seems like a pretty strong prima facie case for the important of the REIT structure, if you are a U.S. heavy investor looking for diversification. In fact, it appears to be important enough that U.S. REITs are a better diversifier than a Global ex-U.S. real estate fund which has been diluted with non-REITs!

I don't know if that is proof, but it is pretty darn interesting.

By the way, FFR apparently tracks the FTSE/EPRA/NAREIT Developed Real Estate Index (so not quite my index, but related in terms of mix). Recall this is basically half U.S. REIT, then half ex-U.S. mix of REIT and non-REIT real estate.

It slots in at a correlation of 0.79 with VTSMX. That's exactly what we would expect . . . right in between U.S. REIT and Global ex-US Property.

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Re: International REIT

Post by iceport » Wed May 10, 2017 10:17 am

NiceUnparticularMan wrote:I don't know if that is proof, but it is pretty darn interesting.
I agree on both counts. There are certainly many variables at play, and limited data is being considered. However, I do agree that this discussion and the points you raised are very interesting. Thanks!

Funds may have been forced to use an imperfect index roughly 7 years ago because the legal REIT structures had not been as widely adopted yet. Possibly, it was a choice between not offering exposure to international real estate at all, or offering decent but imperfect exposure to those assets.

I'm still glad to have low cost access to international real estate through Vanguard's offering, though I do see the distinct possibility that the index it tracks makes compromises that might dilute the efficacy of that access somewhat.
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Re: International REIT

Post by NiceUnparticularMan » Wed May 10, 2017 11:05 am

iceport wrote:Funds may have been forced to use an imperfect index roughly 7 years ago because the legal REIT structures had not been as widely adopted yet. Possibly, it was a choice between not offering exposure to international real estate at all, or offering decent but imperfect exposure to those assets.
That seems to be what S&P was arguing, and it makes sense. I guess one can hope that non-REITs will be less and less of these funds over time, although personally, I would still love it if I had access to a cheap all-REIT ex-US fund. Maybe some day.

By the way, it looks like REET is an all-REIT product based on a FTSE/EPRA/NAREIT index, but it includes a lot of US REITs--about 65%--which is exactly what S&P was pointing out.

REET has only been around since 7/2014, so this is even sketchier information. But since then, the correlations with VTSMX look like:

VTIAX 0.83
VNQI 0.78
REET 0.68
VNQ 0.61
DFITX 0.55

That's just odd--I would have thought REET would slot in between DFITX and VNQ.
I'm still glad to have low cost access to international real estate through Vanguard's offering, though I do see the distinct possibility that the index it tracks makes compromises that might dilute the efficacy of that access somewhat.
At a minimum, these tests indicate it is "working" in the sense of having lower correlations to US stocks than regular International, and I wouldn't be surprised if that effect increased in certain scenarios. I'd suggest, though, that at the moment you should be more thinking in those terms, namely possibly using some of your international allocation for VNQI, than in terms of using some of your U.S. REIT allocation for VNQI (if that makes sense).

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Re: International REIT

Post by iceport » Wed May 10, 2017 11:38 am

NiceUnparticularMan wrote:
I'm still glad to have low cost access to international real estate through Vanguard's offering, though I do see the distinct possibility that the index it tracks makes compromises that might dilute the efficacy of that access somewhat.
At a minimum, these tests indicate it is "working" in the sense of having lower correlations to US stocks than regular International, and I wouldn't be surprised if that effect increased in certain scenarios. I'd suggest, though, that at the moment you should be more thinking in those terms, namely possibly using some of your international allocation for VNQI, than in terms of using some of your U.S. REIT allocation for VNQI (if that makes sense).
I'm not contemplating any portfolio changes, unlike the OP. I have about 14% of equities dedicated to REITs/real estate: 7% in US REITS and 7% in international real estate via VNQI. (Counting VNQI, over 38% of equities is exposed to unhedged international stocks.) In following this discussion, I found REET and was intrigued, but I don't plan any changes. I do like having two distinct funds to re-balance between.

I need some harmless way of keeping portfolio management interesting... ;-)
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Re: International REIT

Post by NiceUnparticularMan » Wed May 10, 2017 11:47 am

iceport wrote:I'm not contemplating any portfolio changes, unlike the OP. I have about 14% of equities dedicated to REITs/real estate: 7% in US REITS and 7% in international real estate via VNQI. (Counting VNQI, over 38% of equities is exposed to unhedged international stocks.) In following this discussion, I found REET and was intrigued, but I don't plan any changes. I do like having two distinct funds to re-balance between.
Yeah, I wouldn't actually recommend any changes to you either. Based on this discussion, I'd personally want more U.S. REIT than international RE, but that would be a small and likely pointless change to begin with, and moreover unless you use stock funds that exclude REITs, you may well be there already depending on the mix of other stock funds you hold.

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Re: International REIT

Post by pop77 » Wed May 10, 2017 2:23 pm

I was surprised at this. I ran correlations among all the asset classes I own and found that VNQI has higher correlations with all of them except total bond market.

VNQ has negative correlations with Vanguard LC Value, LC Blend, Small Cap Index and FTSE Index and surprisingly VNQI has positive correlations with all of them.
VNQ has zero correlation with Vanguard LC growth but VNQI has a positive correlation (0.38)

VNQ has a 0.62 correlation with Vanguard total Bond Market but VNQI has a -0.09.

Would you take this as a positive or negative? On the one hand VNQI behaves totally different than VNQ on the other hand, it behaves more similar to the rest of portfolio :confused

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Re: International REIT

Post by NiceUnparticularMan » Wed May 10, 2017 3:21 pm

pop77 wrote:Would you take this as a positive or negative? On the one hand VNQI behaves totally different than VNQ on the other hand, it behaves more similar to the rest of portfolio :confused
So I think I would stick with the conclusion I mentioned above.

I wouldn't replace VNQ with VNQI, because apparently that is REALLY diluting what we might call your "REIT-specific exposure", and that REIT-specific exposure is apparently quite important.

I might replace some other International with VNQI, however. But I guess I would want to know more, as in whether alternatives like International Small, Value, or EM were more efficient diversifiers.

And to be honest--it kinda looks to me like what I was afraid of, which is that I am not sure there is much difference between VNQI and a random sector fund. And that kind of diversification is often an illusion, meaning overweighting mere sectors tends not to have any expected benefits.

So at the moment, I am feeling no temptation to separately invest in VNQI, beyond the similar sort of holding I picked up in my Real Return fund. But I wouldn't panic-sell it either if I already owned it . . . I would just make sure I wasn't short-changing my U.S. REITs in order to make room for it.

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Re: International REIT

Post by NiceUnparticularMan » Wed May 10, 2017 4:07 pm

Doing my own homework--again using VTSMX for the correlation test, I get:

VTIAX 0.88
EFV (Developed Value) 0.87
VSS (All-World Small) 0.87
VWO 0.83
VNQI 0.83
VNQ 0.75

So, continued bad news--not as good as VNQ. Good news, not any worse than these other international slices.

So, I'd say preliminary analysis is you are not hurting yourself with some International in VNQI. How much you are helping yourself, I don't know.

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Re: International REIT

Post by pop77 » Thu May 11, 2017 3:30 pm

Interesting that VTSMX has a 0.75 correlation with VNQ when it has negative correlation with LC Value, LC growth, LC Blend , Small Cap and Mid cap individually...

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Re: International REIT

Post by NiceUnparticularMan » Thu May 11, 2017 7:07 pm

pop77 wrote:Interesting that VTSMX has a 0.75 correlation with VNQ when it has negative correlation with LC Value, LC growth, LC Blend , Small Cap and Mid cap individually...
Maybe a time period thing? I'm constrained by when all of those ETFs were available.

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siamond
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Re: International REIT

Post by siamond » Thu May 11, 2017 10:07 pm

OP, you may want to consider the iShares Global REIT fund (REET) for a simpler replacement of a combo VNQ/VNQI.

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zonto
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Re: International REIT

Post by zonto » Thu Oct 19, 2017 1:12 pm

Thank you all for your input above. I've been researching this topic extensively recently and found it to be a great help. I thought I'd share a few more of my findings as of today.

Correlation to Vanguard Total Stock Market (VTSMX):
  • VNQ (Vanguard REIT Index) - 0.60
  • REET (iShares Global REIT Index)- 0.67
  • VNQI (Vanguard Global ex-U.S. real estate index) - 0.77
  • SFREX (Schwab fundamental global real estate index) - 0.77
Correlation to Vanguard Total International (VGTSX):
  • VNQ - 0.51
  • REET - 0.65
  • VNQI - 0.88
  • SFREX - 0.80
- Correlation between REET and VNQ: 0.91

However, I also ran efficient frontier plots for as long as the above funds existed:
  • Vanguard REIT Index (VGSIX) vs. VTSMX from Jan. 1997 through Sept. 2017 (source): 20% VGSIX provided optimal allocation from a volatility reduction perspective
  • Vanguard Global ex-US Real Estate Index (VGXRX) vs. VGTSX from Jan. 2011 (VGXRX inception year) through Sept. 2017 (source): 20% VGXRX provided optimal allocation from a volatility reduction perspective
  • VGSIX vs. VGXRX from Jan. 2011 (VGXRX inception year) through Sept. 2017 (source): 50/50 provided optimal allocation from volatility reduction perspective

Schwab published a white paper on global real estate in connection with SFREX inception. They included a periodic table that shows global real estate, as represented by the FTSE EPRA/NAREIT Global Index.

It seems that real estate / REIT funds as 20% of equity is a reasonable target. I split the rest of my equity portfolio 50/50 between U.S. and international, which the efficient frontier between VGXRX and VGSIX seems to support. However, the high correlation of Vanguard's international real estate index to Total International has me concerned. As of September 30, 2017, VGXRX's portfolio is comprised of only 42.5% REITS, with the rest in real estate operating companies, development and diversified real estate activities (source).

Have people decided to stick with the Vanguard fund split or move toward REET? Expense ratio of a 50/50 VNQ/VNQI split is 0.14%, same as REET's expense ratio. Is the REIT structure worth more than the additional geographical and company diversification that Vanguard's international real estate index provides?
Last edited by zonto on Sat Oct 21, 2017 5:39 pm, edited 1 time in total.

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siamond
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Re: International REIT

Post by siamond » Thu Oct 19, 2017 4:12 pm

Here is a Bogleheads blog entry I wrote a little while ago that may provide some additional informaiton to folks interesting in domestic and international real estate funds.
https://finpage.blog/2017/09/11/portfol ... ing-bonds/

zonto wrote:
Thu Oct 19, 2017 1:12 pm
Have people decided to stick with the Vanguard fund split or move toward REET? Expense ratio of a 50/50 VNQ/VNQI split is 0.14%, same as REET's expense ratio. Is the REIT structure worth more than the additional geographical and company diversification that Vanguard's international real estate index provides?
This is an example of where the discipline of an IPS may prove useful, and also how one can make things too complicated by trying to be too cute... I started allocating 10% to REITs in my original AA design (using VNQ). After a while, I split 50/50 between VNQ and VNQI, feeling that I should be as geographically diversified with real estate as I am on regular stocks. While grumbling about the purchase/redemption fees coming with VNQI. And the weird index it follows.

More recently, I discovered the existence of iShares REET, and it seemed very tempting to replace the VNQ/VNQI combo. My IPS told me to mull it over for a few months. Then I dragged my feet a tad longer, mostly the VNQI redemption fee bugging me. Then I wrote my little study (the blog entry) while analyzing monthly returns in more depth. And figured out that I was really splitting hairs and that consolidating the REITs with my allocation to MCV/SCV would probably be a welcome simplification without losing much of the expected overall dynamics. My IPS told me to mull it over for a few months. I'm supposed to make a decision by the end of the year. We'll see...

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Re: International REIT

Post by zonto » Sat Oct 21, 2017 10:05 pm

Thanks siamond. My IPS states to allocate ~20% of equity to global real estate (14% of overall portfolio), but is not more specific than that (yet). The rest of equities are 50/50 total market indices.

I was using a 50/50 SCHH / VNQI split in my Roth IRA at Schwab, but got tired of the commission once a year and the premium on the latter, so I swapped into SFREX (Schwab Fundamental Global Real Estate Index Fund) earlier this year for convenience and simplicity. My research now is to determine whether to keep using SFREX and where to put my 2018 Roth IRA contribution, Vanguard or Schwab, as it will all be invested into the real estate slice which I'm getting up to IPS weight.

I was also incorrect about the index in the Schwab white paper above. The periodic table therein shows performance of the FTSE EPRA/NAREIT Global Real Estate Index, not the FTSE EPRA/NAREIT Global REIT Index which REET tracks. The former includes REOCs and real estate development companies.

The expense ratio of SFREX is higher at 0.39%, but so far it has better risk-adjusted returns than the 50/50 split of the two Vanguard funds has this year and since SFREX inception. SFREX will hit its three-year mark this coming week, so I hope to further compare these measures on M*. Interestingly, SFREX holds about 63% REITs, whereas the 50/50 Vanguard fund split holds about 71%. I've also read analysis in other Bogleheads forum threads, including from Larry Swedroe, who touts price / cash flow as the appropriate measure for REIT and real estate investment valuation. This was part of the argument years ago to invest in international REITs, because U.S. REITs were comparatively overvalued.

As of today, per M* the price / cash flow of these funds is:
  • SFREX - 8.72
  • Vanguard REIT index - 14.35
  • Vanguard Int'l RE index - 8.60
  • REET - 14.43
Even with 45% of the SFREX portfolio in U.S. securities, SFREX's P/CF is nearly identical to the Vanguard international real estate fund's. Moreover, the fundamental index has outperformed its cap-weighted counterpart
(source). The most notable geographic difference in the RAFI index is a slight underweight to the United States and an overweight to Pacific ex-Japan.

I looked into the other Schwab fundamental index funds years ago when they were released, but they seemed to basically be the equivalent of a small / value tilt. With SFREX, its market cap is actually larger than the comparable cap-weighted index and the focus on adjusted sales, retained cash flow, and dividends plus buybacks appears to be offering value. The index eschews timber and mortgage REITs (source, see pp.10-11). I have until January 25 to make the decision, so I'll update with any further research in case others find it helpful.

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Re: International REIT

Post by siamond » Sun Oct 22, 2017 8:05 am

Hey zonto, thanks for sharing all those interesting data points. Do keep sharing, please!

It seems to me that you're following a path somewhat similar to mine, seeking balanced world allocations, simplicity, less fees, and... well, meandering a tad too much. I think you need to settle on a plan and stick to it. It could be iShares REET or it could be Schwab SFREX, but it really has to stay the same choice (hence the same index) for a long time to come. I don't think any of those is better than the other, quite frankly, but you really need to set and stay the course. Sorry if I am stating the obvious, but from first-hand experience, it is actually harder than I thought it would be! We always learn sometimes new, and we want to tune accordingly, but... at some point, we have to stop that, and stick to a simple plan.

As to P/CF valuations, well, I would be skeptical about the author you mentioned (his CAPE views seriously lacking coherence), but anyhoo, your AA decision should be made irrespective of current valuations.

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zonto
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Re: International REIT

Post by zonto » Sat Nov 04, 2017 7:43 am

siamond wrote:
Sun Oct 22, 2017 8:05 am
Hey zonto, thanks for sharing all those interesting data points. Do keep sharing, please! . . .

As to P/CF valuations, well, I would be skeptical about the author you mentioned (his CAPE views seriously lacking coherence), but anyhoo, your AA decision should be made irrespective of current valuations.
Three-year volatility analysis is up on Morningstar for SFREX. Ran a compare against the two Vanguard funds and REET.

Code: Select all

Fund Name:      SD        Return     Sharpe Ratio     Sortino Ratio
SFREX           11.10     7.51       0.67             1.16
VGSIX           13.44     5.62       0.44             0.76
VGXRX           11.39     5.33       0.48             0.77
REET            11.54     3.89       0.35             0.60
Category: GR    10.96     3.73       0.35             0.58
SFREX not only had the lowest volatility over the period, it also had the highest return and the highest risk-adjusted return. Through yesterday's close, it ranks in the 13th percentile for YTD returns, 81st for one-month returns, 6th for one-year returns, and 3rd for three-year returns.

SFREX has done exceptionally well this year, so as a sanity check I ran a compare on Portfolio Visualizer of it vs a 45/55 split of VGSIX and VGXRX, respectively, from January 2015 through year-end 2016. Results here. Over this period, SFREX had slightly higher SD (13.11% vs. 12.71%), but the advantages in CAGR and Sharpe/Sortino ratios remained. Viewing this Vanguard split (which corresponds closely to the FTSE global real estate index weightings) as the baseline, I'm confident enough that SFREX should perform roughly the same, with the potential for ourperformance due to the fundamental cash flow weighting indexing strategy. I'll watch for the next few months, but current plan is to use SFREX exclusively and direct future Roth IRA contributions to Schwab for the same.

To be clear, my allocation to the sector / asset class does not depend on current valuations. I'm purely looking at valuations within that sector, mostly between U.S. and foreign REITs and real estate securities, as an intellectual exercise. I did some more digging on your point re: P/CF to remove the Swedroe effect. Given that REITs must pass 90% of their income to shareholders, the metric made sense to me. iShares only mentioned P/CF and P/B as the valuation metrics on its launch page for REET.

However, I am concerned about current U.S. REIT valuations vs. international real estate security valuations, which makes me feel even better about the 50/50 split I decided on years ago before even starting this research. The discrepancy in these valuations is much greater than the discrepancy between valuations of the broad U.S. equity market and the broad international equity market. As people have poured money into U.S. REITs in recent years, concerns have arisen re: the effect of indexing on this sector. See High-priced REIT shares are creating problems for index funds. There are other discussions on the forum about the November 2017 proxy votes re: the Vanguard REIT Index Fund and how these issues may play into Vanguard seeking shareholder approval to expand the fund's reach to non-REIT securities. Though I doubt Vanguard would publicly state the motivation behind the proposed move is what the author surmises, I wouldn't be surprised if it was.

Here is a list of resources I've bookmarked recently in case others find helpful:
Last edited by zonto on Sat Nov 04, 2017 11:37 am, edited 1 time in total.

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Re: International REIT

Post by siamond » Sat Nov 04, 2017 10:35 am

Cool. You're doing your homework. Just be very careful that drawing a conclusion based on a 3-years period conveys very little meaning, but I understand, this is all we have with both SFREX and REET.

As an intellectual exercise, I'd suggest you take a look at this comparison between Vanguard funds, and ponder what you would have decided at the end of 2014, WITHOUT the benefit of hindsight:
PortfolioVisualizer 2011-2014 analysis

Then try 2015-2017 with the same components. And finally reflect on your analysis by the end of 2017. Interesting, isn't it?

Again, I don't see what would be wrong in going with SFREX, as you seem to be inclined to do, as long as you stick with it through time.

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