Get Real with Real Estate ETPs

Investors who haven't been scared off by the weak fundamentals could benefit from the diversification and liquidity benefits of real estate ETFs

Morningstar ETF Analysts 28 February, 2011 | 2:00PM
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Most investors are aware that real estate is one of the five broadly recognised asset classes, along with equities, fixed income, cash, and commodities. And if you purchase your own home, real estate will likely be the biggest financial investment of your life. However, many investors will be surprised to find out how important real estate is to the global economy: according to FTSE, 50% of global wealth is tied up in real estate. While many homeowners and other real estate investors may never want to look at real estate again after the crash, there are multiple reasons why investors may want to consider real estate-related equities as part of their diversified portfolio.

Historically, real estate has offered attractive returns. The FTSE EPRA/NAREIT (European Public Real Estate Association/National Association of Real Estate Investment Trusts) Developed Europe index had a compound annual return of 6.2% for the past ten years, while the MSCI Europe equity index could only muster a return a shade greater than 1% annually from 2001 to 2010. Of course, this period included a great bubble in property values, and even after the crash it may take years for the commercial property market to resume growing again.

As many investors with recent real-estate experience can probably guess, the asset class has been riskier than both equities and fixed income over this time period. The standard deviation of returns for the MSCI Europe Real Estate index has been 20% over this timeframe, compared to 17% for the MSCI Europe Index and only 6.5% for the Barclay's Capital Global Aggregate Fixed-Income Index.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Morningstar ETF Analysts  research hundreds of ETFs available to European investors. The Morningstar Rating for ETFs is based on a risk-adjusted performance measure.