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Remember Detlef Schrempf? He’s the last basketball star awarded the NBA’s Sixth Man of the Year Award twice consecutively (in the 1990–1991 season and again in 1991–1992). The sixth man is the player who enters the game from the bench, while five others start the game. To me, REITs are like the Detlef Schrempf of the capital markets, because they play a critical role in asset allocation but often get overshadowed by the proverbial Michael Jordans of the world.
Until 2016, REITS were classified as a sub-industry inside the overarching financials sector, which was one of just 10 GICS “level one” sectors until last year. But now the GICS system, which is used by the likes of MSCI and S&P, views REITs as being independent enough to change the sector count to 11.
This is a major development for listed real estate because it wasn’t even until this century that REITs were added to the S&P 500, yet today that Index counts 33 real estate companies among its components.
In countries such as the U.S. and Australia, REITs have been a part of the investment landscape for generations, although they were widely popularized only in the last decade or so. In some major countries, like the UK and Italy, the REIT structure didn’t even come into being until 2007. It could still be early days for adoption of this sector.
The “Sixth Man” in Plain Sight
The WisdomTree Global ex-U.S. Real Estate Fund (DRW), the ETF that tracks the WisdomTree Global ex-U.S. Real Estate Index, covers securities worth $1.21 trillion, a considerable sum that is equal to 5.9% of the $20.4 trillion valuation accorded non-U.S. equities.
Importantly, because REITs are interest rate-sensitive, their correlation to broad equities is often lower than most other sectors. In figure 1, we see that the Dow Jones Global ex-U.S. Select Real Estate Securities Indexhas a correlation to the broad market Dow Jones Global ex-U.S. Index of 0.82, the third lowest correlation to the broad market of all 11 sectors. Not surprisingly, the WisdomTree Global ex-U.S. Real Estate Index had a similar correlation to the global equity index (0.86). The correlation between the two real estate proxies was 0.92.