On November 19, 2021, real estate fund trading began on the Moscow Exchange
The fund allows you to invest in American REITs — it includes more than 120 shares of companies in the real estate sector. The total cost of the first real estate ETF on the Russian market is only 0.6%. The fund allows you to halve the taxation of dividends on REIT.
Because of their diversity, indices and therefore real estate ETFs have different risk and return characteristics. If you look at their profitability over the past 10 years, then the average income was 156.3% in US dollars (or 9.8% per annum). They showed a high average annual volatility of 19.2% and a maximum drawdown of up to -44%. It is quite expected that the Sharpe and Sortino ratios were less than one (these indicators measure the risk and return of a portfolio, the higher they are, the more income the investor receives per 1 unit of risk).
However, over the past year, real estate indices have shown outstanding results: 48.9% return with 15.8% volatility. Sharpe and Sortino were well above one, with the Solactive index followed by the new FXRE fund at 2.90 and Sortino at 4.37.
But you can still reduce the tax if you invest in FXRE.
Low entry threshold.
At the same time, in order to build a portfolio with the same shares as in FXRE, an investor will have to invest more than 500 thousand US dollars. Even theoretically, it is impossible to do this through the St. Petersburg stock exchange — only 51 REITs are traded on it, and there are 130 of them in FXRE.
To determine the optimal share of real estate in the investment portfolio, we traditionally recommend starting from the investment term and risk profile. There are no universal portfolios, but there are several successful examples of asset allocation using real estate funds, one of them is
We can replicate Swensen’s portfolio with FinEx funds. For this we use FXUS, FXDM, FXCN, FXTB, FXTP and a new fund on REIT — FXRE.
Average annual return and risk of FinEx funds in the portfolio for the last 10 years, USD
The correlation of the new FXRE fund with the US stock market will be higher than the correlation with the index of developed countries without the US — 0.74 and 0.48, respectively. Other ETFs in the portfolio are weakly correlated with FXRE, which increases the diversification effect. The government bond market has a negative, close to 0, correlation with the real estate market, while FXCN is only 0.19.
Correlation between FinEx funds in the portfolio for the last 10 years, USD
Let’s take the historical data of FinEx fund indices and backtest Svensen’s portfolio with the given weights.
As we can see, the portfolio income for 10 years was 161% (10.05% per annum). Despite a sharp drop in 2020 due to the COVID-19 pandemic, the portfolio quickly began to recover and reached new highs in 2021.
Now let’s check the impact of changes in the weighted shares of FXRE in the portfolio on its main indicators. The higher the share of FXRE, the more profitable the portfolio. At the same time, the maximum drawdown and the risk level also increase. However, it is useful to remember that the real estate market is cyclical, which means that 10 years is not a long enough period to draw long-term conclusions.
Balanced Portfolio Ratios over 10 Years
In our search for the optimal weighting of FXRE in Swensen’s balanced portfolio, we found that adding up to 20% of the new FXRE fund to the investment portfolio could lead to better returns. At the same time, the investor assumes a higher risk — which is why it is important to take into account the risk profile and tolerance to market shocks.
An alternative view of FXRE’s portfolio share is offered by the Wilshire Funds Management Glide Path Model. According to the methodology,
Optimal share of REITs in the portfolio depending on the age of the investor (Wilshire Funds Management model)
A study by Wilshire Wealth Management calculated that the optimal allocation of funds between global REITs and other real estate companies is even higher than shown in the figure. The company’s analysts suggest investing more than 15% in REIT funds for an investor with an investment horizon of 45 years, gradually reducing the weight to 7% + upon retirement.