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Summary The ETF offers investors a fairly unique risk exposure. The fund has heavier allocations to individual countries than I would prefer. The ETF has more concentration to individual company weights than I would want to see. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. One of the funds I am researching is the iShares FTSE EPRA/NAREIT Global Real Estate Ex-U.S. Index ETF (NASDAQ: IFGL ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. Expense Ratio IFGL sports an expense ratio of .48%. Not impressive, in my opinion. Yield The ETF offers a fairly nice distribution yield 3.66%. While there are some things I don’t like, that is a fairly respectable yield. If investors are going to buy an ETF where the individual holdings are largely unfamiliar to them, then I’d prefer to see the ETF have a strong yield to encourage the shareholders to maintain their positions during periods of volatility. Some investors will focus on wanting to see the value of their portfolio increase with every statement, but I think they should also keep an eye on the amount of income the portfolio is generating. Country Allocations I grabbed the following chart from the iShares website: (click to enlarge) I understand that international equity REIT ETFs have a tendency to overweight Japan. No big deal, we can work around that. On the other hand, they are also going fairly heavy on Hong Kong. The top 4 country weights represent around 65% of the portfolio. I find that a little disappointing since I believe international REIT exposure should be designed to improve diversity in small allocations and lead to a lower risk portfolio rather than believing that investors should use the allocation to pump up returns. Since I like this niche for only small allocations to reduce risk rather than drive returns, a heavy allocation to individual countries is a negative factor for me. What I would like to see is the top allocations reduced and increase in the allocations to other parts of Europe (such as Sweden and Switzerland). I wouldn’t mind seeing some fairly light allocations to more exotic locations either to get a little REIT exposure to the emerging markets. Missing Allocations If you’re trying to build a thoroughly diversified international position for the portfolio, it would be wise to consider including ETFs in Latin America and Africa. I’m not a fan of putting huge weights on emerging markets, but a very small weight is reasonable since the goal is diversification of risk factors. Investors may also notice that this ETF went heavy on Hong Kong rather than including an allocation directly to China. I don’t have a problem with that strategy. The markets are correlated but I’d feel more comfortable with the exposure to Hong Kong. REITs The other thing investors should remember is that this international allocation is investing in REITs. In the domestic market REITs and regular equity markets can diverge quite substantially over years so investors would be wise to consider including allocations to the normal corporate international market. Holdings I built the following chart to represent the top 10 holdings. (click to enlarge) These allocations are a little heavy in my opinion. Just like the allocations to individual countries were heavy, I’d rather see the ETF limiting positions to around 2% to 3% of the portfolio as the cap for a single allocation. The positions should not have a hard cap that would force immediately sales and expose the ETF to losses from rapidly liquidating positions, but a soft cap that encourages them to reallocate capital would be favorable. Conclusion The expense ratio is too high for my liking, but the ETF still offers some diversification benefits as long as the weight is low. I’d really prefer to see the ETF offering a more thorough diversification across both individual holdings and weights for countries. If investors are confident these markets will outperform over the next several years, than there is no problem with the concentrated allocation. If the investors, like me, see international REIT ETFs as a diversification play then it doesn’t make sense to have the positions concentrated. Scalper1 News
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