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RWX: Not My First Choice For International Real Estate

Summary RWX has too much volatility and correlation to the S&P 500. The dividend yields aren’t bad, but they aren’t great enough to justify the investment. The high expense ratio hammers home my view that this just is not an attractive way to do international investing. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve risk adjusted returns relative to the portfolios that normal investors can generate for themselves after trading costs. A substantial portion of my analysis will use modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce the total portfolio risk level. In this article, I’m reviewing the SPDR Dow Jones International Real Estate ETF (NYSEARCA: RWX ). What does RWX do? RWX attempts to track the investment results of the Dow Jones Global ex-U.S. Select Real Estate Securities Index. The ETF falls under the category of “Global Real Estate”. Does RWX provide diversification benefits to a portfolio? Each investor may hold a different portfolio, but I use the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) as the basis for my analysis. I believe SPY, or another large cap U.S. fund with similar properties, represents the reasonable first step for many investors designing an ETF portfolio. Therefore, I start my diversification analysis by seeing how it works with SPY. The correlation is about 84%, which is high enough that RWX does not offer the level of diversification benefits that I would like to see. Standard deviation of monthly returns (dividend adjusted, measured since January 2007) The standard deviation isn’t going to make a strong case for investing in RWX. For the period I’ve chosen, the standard deviation of monthly returns is 142% of the deviation for the S&P 500. Due to the combination of volatility and correlation, it is not viable to use RWX as a way to reduce the portfolio risk if the major holding in the portfolio is SPY or another major domestic equity ETF since most major domestic equity ETFs have extremely high correlations to SPY themselves. I don’t believe historical returns have predictive power for future returns, but I do believe historical values for standard deviation of returns relative to other ETFs have some predictive power on future risks and correlations. Yield The distribution yield is 3.03%. This may be one of the strongest areas for the ETF, but investors can find similar levels of yield on domestic equity REIT ETF investments with lower levels of risk. Expense Ratio The ETF is posting 0.59% for an expense ratio. Since I focus on buying ETFs with expense ratios below 0.10%, the costs on this investment are way above my comfortable threshold. However, the overall international REIT ETF sector has high expense ratios. Market to NAV The ETF is trading at a 0.21% premium to NAV currently. I think any ETF is significantly less attractive when it trades above NAV. The premium to NAV is a little surprising since the trading volume (over 600,000) should be enough to mitigate any meaningful deviation from NAV. On the other hand, when I look at the average monthly premium/discount to NAV, I see that over the last year the ETF has often bounced between trading at premiums and discounts to NAV. The most notable period was October of 2014 when the ETF averaged a premium of nearly 1.5% to book value. Largest Holdings The diversification within the ETF is pretty weak as demonstrated by my chart of the top holdings. (click to enlarge) Despite the large positions in a few of the holdings, doing individual due diligence on each investment would be fairly difficult. Investors buying into the international REIT ETF will need to rely on markets being at least somewhat efficient. Allocation by Country The following chart breaks down the holdings by country. (click to enlarge) When it comes to international diversification, I’m fairly happy with the way the portfolio is set up. For it being a real international fund, I would prefer some exposure to Africa and South America in the portfolio, but on the whole, diversification is fairly solid. It is a pet peeve for me when funds label themselves as international and then put 40% to 70% of the portfolio in a single foreign country. Conclusion In my opinion, it is difficult to make a solid argument for the use of the SPDR Dow Jones International Real Estate ETF under modern portfolio theory. The high level of volatility combined with the high correlation leaves investors requiring a higher expected level of return on the investment. I don’t see that as a likely result when the ETF is charging a high expense ratio. The holdings would have to significantly outperform the S&P 500 over the long term to provide enough returns to compensate investors for the additional risk. On top of the higher level of returns, the ETF also has to be able to cover the higher expense ratios. In short, I’m just not seeing a compelling long-term option for inclusion in my portfolio. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.

A Compilation Of The Best International Equity ETFs

Summary I’m rounding up six of my favorite international equity ETF investments. I’m temporarily bearish on two of them for exposure to H-Shares in Hong Kong. I want international diversification without China. I like VNQI despite a high expense ratio because it is a fairly unique ETF for diversification. My favorite international ETF is SCHF due to the rock-bottom expense ratio. I’ve been holding off on purchases due to correlations on international investments. If China crashes, it may drag down most international investments. That could create an excellent buying opportunity on SCHF. Investors should be seeking at least some international exposure in their portfolio for diversification. To help with that challenge, I rounded up several of the ETFs that I believe offer some of the most compelling alternatives. These options have low expense ratios relative to the sectors they are covering and each is free to trade in at least one brokerage. Given the volatility of international equity markets, I consider a lack of trading costs to be a nice bonus for investors that may want to rebalance frequently. Since I want these assets to be solid targets for rebalancing, I also want strong liquidity so the bid-ask spread will be small. Below is a short list of contenders for the best international ETFs: Vanguard Global ex-U.S. Real Estate ETF (NASDAQ: VNQI ) Schwab International Equity ETF (NYSEARCA: SCHF ) Schwab Emerging Markets ETF (NYSEARCA: SCHE ) Schwab International Small-Cap Equity ETF (NYSEARCA: SCHC ) Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) Vanguard Total International Stock ETF (NASDAQ: VXUS ) While I like all of these ETFs for long-term returns due to low expense ratios, I feel some are more compelling than others at the present time. Different Exposure Diversified investments in global real estate are very rare. This is a niche sector, and I like the diversification benefits of including it in a portfolio. If the expense ratio was present on another ETF (.24%), I would find that expense ratio less attractive. However, for this niche market, it is a fairly low expense ratio. Another major factor for me right now is safety. I have been vocal about my bearish assessment of China and that means I prefer international equity with less exposure to China. Comparative Rankings for Emerging Markets In this list, which does not contain a single loser, I would personally put SCHE and VWO at the bottom because I’m not big on emerging markets right now. This is a temporary placement based on my assessment of which countries I want to include in my portfolio. China is being classified as an emerging market and has a heavy weight in these ETFs. That doesn’t mean that they are specifically holding the A-shares for Chinese equities, but I’m not big on the H-shares in Hong Kong either. I expect a crash in the Chinese market to result in dramatic losses of wealth for domestic consumers, and I see that loss of consumer wealth as causing a fundamental problem for sales in the country. Declining sales may drive declining earnings and that would justify lower valuations of the companies regardless of which market is being used to create exposure to businesses in China. If I were bullish on China, I would rank these two ETFs as being extremely attractive. Given my bearish stance, the combination of large positions in China and high correlation between emerging markets during times of stress (again, not the fault of the ETFs) makes me want to underweight emerging markets and severely underweight China. I favor trading shares of SCHE for free trading in a Schwab account. Investors with free trading on VWO should make the exact opposite argument. VNQI The market exposures are concerning me for VNQI, but holdings in China are fairly slow while still offering me a very unique portfolio. Since I want diversification and don’t want China, this is a natural choice for inclusion though I may be heavier on it than I really want to be. It is running around 13% to 14% of my portfolio. International Equity This section is looking at international equity that is not specified as emerging markets. These ETFs should hold more developed markets, and I expect them to be less volatile. I like all three of these ETFs (SCHF, SCHC, and VXUS) as solid options for international exposure, but the high correlation of emerging markets does not end with the other emerging markets. The emerging markets also have a fairly strong correlation to international equities when the markets are stressed. A terrible performance by China could hurt these ETFs because of the correlation even though they have solid holdings in markets that I consider to be more fundamentally sound. I don’t want to give up international equity exposure, and these are some of the best ETFs for gaining it. They all offer expense ratios below .20 and exposure to markets that I think are less risky than the emerging markets. I picked SCHF as my ETF to hold for a couple reasons. While the free trading is nice for making small additions, the ETF also delivers rock-bottom expense ratios for international ETFs. If I decide to make any additions to my international equity exposure, SCHF is the easy choice. SCHC offers some very interesting exposure elements with small-cap equity, but I’m concerned about market stress and correlations. Therefore, I figure small-cap international equity is more risky than large-cap international equity. Conclusion I find all six of the ETFs to be legitimate contenders for best of breed in their respective category. Due to expense ratios and a desire for more developed markets and larger companies, SCHF is the easy choice for my portfolio. The thing that makes me hesitate to buy more shares is not a concern about the fundamentals of the companies being overvalued; it is concerns about correlation to China hurting international returns. To conclude that though, if China crashes and correlation drags down share prices on SCHF, I’ll be one of the investors buying the cheap shares to take advantage of the situation. Disclosure: I am/we are long VNQI SCHF. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.

The Vanguard Short-Term Bond ETF Is A Great Replacement For Cash

Summary The Vanguard Short-Term Bond ETF delivers excellent diversification benefits relative to the equity market without being as miserable as a savings account. The bonds in the Vanguard Short-Term Bond ETF are focused on very high credit quality but there is a small selection of lower rated bonds to enhance returns. The Vanguard Short-Term Bond ETF bond selections contain some diversification in maturity to give investors a focus on short term investments without giving up on yield. The Vanguard Short-Term Bond ETF (NYSEARCA: BSV ) is a solid bond fund for the very conservative investor that wants a place to park while earning a better return than a savings account will offer. Lately I’ve been concerned about the market being relatively highly valued. I don’t intend to retire for quite a while (measured in decades), so I’m willing to be more aggressive with my portfolio. Despite being willing to accept additional risk on my portfolio, I want to be compensated for taking risk. While I still like certain parts of the market (as shown by buying diversified REIT ETFs), I’m looking for ways to get better diversification in the portfolio. The desire for better diversification across asset classes has pushed me to make a few hard decisions. For instance, it is pushing me to slow my rate of purchases on additional equity so I can have more money on hand to buy in if we see a significant retreat in equity prices. Those expectations and desires bring to me look for some solid bond ETFs so I can at least get a little interest on the money that I would otherwise have to hold in cash. Low volatility and low correlation with the domestic stock market are major concerns, but I also want something with reasonable liquidity and low expense ratios. When the yields on bonds are terrible, and I believe that is a fair statement today, a high expense ratio would eat a substantial portion of the returns. In this case, the expense ratio is only .10%. It is in my nature to be cheap and I have to admit, that .10% sounds fair to me. It thoroughly beats many bond funds on expense ratio. How volatile is the Vanguard Short-Term Bond ETF? I started by checking for correlation with the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) by comparing the monthly changes in dividend adjusted closes over the last 8 years. The correlation was 3.34%, which is beautiful. By virtually any measure, incorporating BSV into a portfolio is going to materially reduce the risk of the portfolio. While SPY had a standard deviation of 4.6% in monthly returns, BSV only had a deviation of .777%. Low correlation and low volatility is exactly what we should expect for a fund invested in short-term high quality bonds, but it is always worth double checking. Sources of Return With the returns on short term maturities being very low, investors should consider having at least a little bit of credit risk or duration in their portfolio even if they want to focus on short term holdings. I checked both of those areas to see how the Vanguard Short-Term Bond ETF was doing on internal diversification. Credit The following chart shows the credit quality breakdown: In my opinion, this is a fairly reasonable allocation for an ETF that an investor might want to use as a substitute for cash in their portfolio if they expect to be holding that cash for a few months at a time. The ETF portfolio drops down to ratings as low as Baa but keeps the majority of their holdings in very high credit quality bonds. Maturity The next chart shows the maturity of the various bonds Again the maturity distribution looks good for short term holdings. By dividing the holdings between the different maturities rather than focusing them around a specific point there is more diversification across the short term yield curves which should produce a slight decrease in the expected level of volatility for the expected level of income. A Potential Cash Replacement Looking at the monthly returns over 8 years, I found there was only one month where the change in the dividend adjusted close was equal to 2% or greater. In that one month, it was precisely at 2%. Due to the positive returns from interest and low levels of duration and credit and risk the downside risk is fairly low. Of course, if an investor is using it as a replacement for cash they’ll need to use a brokerage that lets them buy and sell it with no commissions. Conclusion I like the portfolio for the Vanguard Short-Term Bond ETF. The yields are still weak, but that is an issue with high quality short term yields being very low rather than a problem with the underlying ETF. Given the low risk of the bond ETF, I like this fund as a source of diversification in the portfolio. It’s too bad free trading on the ETF is not more widely available, because this looks like a solid place to park cash when the market gets too rich or when investors are just looking for new options. The combination of a small amount of duration with a little credit risk makes this option more appealing to me than a fund that refused to take on any risk in those categories. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.