In addition to the tidy dividends and often high-by-comparison yields, one of the primary selling points with real estate investment trusts (REITs) and the corresponding exchange-traded funds is the perception this asset class, often viewed as alternative, is not highly correlated to traditional equity indexes.
However, data suggest that many big-name U.S. REIT ETFs are highly correlated to the S&P 500 and, in many cases, have roughly the same beta as the benchmark U.S. equity index. Some major U.S. REIT are as much as 80 percent correlated to the S&P 500.
Almost A Year Old
Of course, elevated correlations to U.S. stocks are not a concern for Tierra XP Latin America Real Estate ETF NYSELARE, which allocates about 96 percent of its combined weight to Brazilian and Mexican real estate names.
LARE debuted in December and tracks the Solactive Latin America Real Estate Index.
“The Solactive Latin America Real Estate Index screens for all listed equities with primary listings in the Latin America region and which derive substantially most of their income from real estate and real estate services. The Index then uses dividend yield, market capitalization and liquidity in the underlying shares to determine weights. The Index is rebalanced quarterly,” according to Tierra Funds.
Not only is LARE not highly correlated to traditional equity benchmarks, but its holdings usually sport yields well in excess of those found on comparable U.S. REITs.
Setting Itself Apart
“Latin America real estate companies offer some of the highest dividend yields in the world with Brazil REITs paying around 10 percent and Mexican REITs offering yields of more than 6 percent,” according to LARE Index.
That at a time when yields of 3 percent to 4 percent are considered impressive for U.S. real estate strategies. For those that insist on labeling LARE as a Brazil ETF, notable are the facts that as of August 9, LARE is showing volatility that is about half that of the largest Brazil ETF and a dividend yield that is more than 340 basis points higher. Speaking of yield, LARE’s dividend yield is 5.58 percent, which is far superior to what investors will find on standard U.S. REIT ETFs.
LARE’s underlying index’s “low volatility and low correlation suggest it may be an attractive source of alpha for a broad Emerging Markets strategy and a risk mitigator for a Latin America allocation. For example, LAREPR’s realized volatility is less than half versus the MSCI Brazil Index and 20 percent lower volatility against the MSCI Mexico Index,” according to Tierra Funds.