The Federal Reserve's refusal to raise interest rates to this point in 2016 coupled with investors' seemingly unquenchable thirst for higher-yielding assets have created a perfect storm for real estate stocks and the corresponding exchange traded funds.
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Additionally, real estate stocks and ETFs are getting increased attention ahead of the move, happening at the end of this month, that will see the group depart the financial services sector and become the 11th GICS sector. Obviously, those factors are benefiting US-focused real estate ETFs, but this year's best-performing real estate is an emerging markets fund.
That honor goes to the Tierra XP Latin America Real Estate ETF (LARE), which as of August 9, is up 36.6 percent year-to-date. Said another way, LARE has posted better than double the returns offered by the largest U.S. real estate investment trust ETF.
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.
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With Brazil being one of this year's best-performing markets, emerging or otherwise, LARE may garner comparisons to traditional Brazil ETFs. However, such comparisons are inaccurate. Brazil and Mexico, Latin America's two largest economies, combine for 96 percent of LARE's weight, meaning the ETF is more a dual country/regional fund than a single-country ETF.
Said another way, with Brazilian stocks hot, LARE is not going to outperform a traditional large-cap Brazil ETF. Simple math confirms as much, but that doesn't diminish LARE's opportunity set. Certainly not at a time when yield is a primary concern for many investors.
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.
Likewise, combining the dividend yields on the larges Brazil, Mexico and Latin America regional ETFs generates a number that is below LARE's yield.
Year-to-date, LARE has outperformed all other LatAm ETF strategies with the exception of the benchmark Brazil ETF and the lone Peru ETF.
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