An International REIT ETF is Born, and a Note on Why I Love ETFs.

For the first time, individual investors have access to an international real estate (REIT) index fund in an exchange-traded fund (ETF).  The StreetTracks Dow Jones Wilshire International Real Estate ETF began trading on the American Stock Exchange on December 19th, under the Ticker: RWX.

Details on the new ETF can be found on the StreetTracks Global Advisors website.

I am a huge fan of the new ETF fund structure for individual investors.  They offer a very transparent, low cost method for any individual with a brokerage account to create a diversified portfolio.  Unlike the various shell games that the mutual fund industry has generated over the years to hide the true expenses paid by individual investors, ETFs have very transparent expense ratios, and commissions for trading already reflect rock-bottom prices available at most brokerages.

ETFs are not perfect.  If you want to put $100 away every month, a tradition no-load mutual fund is the right way to go.  Otherwise, the brokerage commissions will kill you.  But for larger accounts, or for investing lump sums, the cost structure of ETFs cannot be beat.

Let’s take an example from my favorite fund family, Vanguard.  They offer a large family of no-load funds, and are famous for their low costs.

The Vanguard Total Stock Market Fund mirrors the entire universe of US Equities, the Wilshire 5000.  According to the Vanguard website, the Investor shares that you would purchase have an expense ratio of only 0.19%.  That’s fantastic compared to the average mutual fund, which charges over 1.0% typically for expenses.  But the exact same fund in ETF form has an annual expense ratio of only 0.07%.

7 Basis Points.  That’s it.  For a fully diversified stock portfolio.  $7 for every $10,000 invested.

Let’s take 3 proud fathers, each of which who wants to save $10,000 at the birth of their child for college 18 years out.  Father 1 invests in a typical mutual fund.  Father 2 invests in the Vanguard Total Stock Market investor shares.  Father 3 invests in the ETF.  Let’s assume, for this example, that all three return the exact same 11% annual return over 18 years.

At the end of 18 years, Father 1 ends up with $55,599.17 to pay for college.  Not bad, not bad at all.

Father 2 fairs much better.  Vanguard’s lower-than-average expenses net him $63,448.47.  Yes, 0.81% of expenses per year matters to the tune of almost $8,000.

Father 3, with the ETF, gets a little bonus in his stocking.  After 18 years, his account is worth $64,696.72.  Almost $1250.00 extra.

Now, the sharp reader out there might be saying, “Adam, you forgot the fact that the mutual fund has no commision cost.  What about the commissions for making the ETF trades?”

Assuming the $10 commission that E*Trade charges on the purchase and the sale, Father 3 ends up with $64,622.02.   Still about $1,183 ahead of Father 2.

Low, transparent expenses are only one reason I like ETFs.  The second is clear, transparent asset allocation.

There are now ETFs for everything.  Until recently, if you wanted to own gold, you had two options: buy the yellow metal itself, and pay storage/security costs or buy a gold mining stock mutual fund.  However now there is an ETF that just does one thing – it owns gold (Ticker: GLD)!

You might be wondering why this is on my mind lately.  Well, two reasons.

Reason 1:  It’s a new year, and one of the financial house keeping chores I like to do at the start of a new year is review finances, saving & investments, and make decisions for the new year.  One of the most important financial chores in any financial plan is “re-balancing” your investments across different types of assets.  Every year is different – some things do well, others do poorly.  Once or twice a year, it’s a good idea to re-set your balance so that you don’t end up over-invested in the things that have recently gone up, and under-invested in the things that have recently gone down.

Reason 2:  StreetTracks Dow Jones Wilshire International Real Estate ETF launched, filling a gap in most people’s asset allocation strategies.

Real Estate is an interesting asset class.  REITs, as a whole, have been on a tear the last few years, so like every boom, the stocks have run up and the yields have gone down.  Still, most analysts would agree that it’s a good idea to have a small portion of your long term savings in real estate.

No, owning your house does not count.  Your house is more a residence than an investment anyway, and it’s far too undiversified, both in terms of sub-sector and location.

There have been real estate mutual funds for a long time, and REITs, as a corporate structure, became big in the 1990s as a way for the average investor to own a piece of a large, diversified real estate portfolio.  However, for a long time, it has been hard for the average US investor to get international real estate exposure.   There has been one or two mutual funds that focus on the area, but they are fairly high cost.

Enter our new friend: StreetTracks Dow Jones Wilshire International Real Estate ETF.

Now you have the ability to allocate a portion of your investment in real estate to the global market.  The index isn’t perfect (this blogger, for example, seems to take issue with the geographic allocation and timing). Nonetheless, this is a great new option for individual investors to have, and in general, most US investors continue to be over-invested domestically, and under-invested globally.

There are also two strong contenders for domestic REIT ETFs to round out your real estate allocation:

  • StreetTracks Wilshire REIT ETF (Ticker: RWR)
  • Vanguard REIT ETF (Ticker: VNQ)

Hopefully, this information will get you thinking about your own asset allocation, and the potential for ETFs as a vehicle for your own savings.