Real Estate

Most investors hold real estate as a home. Some invest separate in this asset class directly or indirectly via real estate investment trusts (REIT). Are these investments effective diversifiers?

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Best Safe Haven ETF?

A subscriber asked which exchange-traded fund (ETF) asset class proxies make the best safe havens for the U.S. stock market as proxied by the S&P 500 Index. To investigate, we consider the the following 12 ETFs as potential safe havens:

Utilities Select Sector SPDR ETF (XLU)
SPDR Dow Jones REIT ETF (RWR)
iShares 20+ Year Treasury Bond (TLT)
iShares 7-10 Year Treasury Bond (IEF)
iShares 1-3 Year Treasury Bond (SHY)
iShares Core US Aggregate Bond (AGG)
iShares TIPS Bond (TIP)
SPDR Gold Shares (GLD)
PowerShares DB Commodity Tracking ETF (DBC)
United States Oil (USO)
iShares Silver Trust (SLV)
PowerShares DB G10 Currency Harvest ETF (DBV)

We consider three ways of testing these ETFs as safe havens for the U.S. stock market based on daily, weekly and monthly return measurement intervals:

  1. Contemporaneous return correlation with the S&P 500 Index during all market conditions.
  2. Return/performance during S&P 500 Index bear markets as specified by the index being below its 200-day/40-week/10-month simple moving average (SMA) for the prior measurement interval.
  3. Return/performance during S&P 500 Index bear markets as specified by the index being in drawdown from a prior high-water mark by more than some percentage (baseline -10%) for the prior measurement interval.

Using daily, weekly and monthly dividend-adjusted closing prices for the 12 ETFs from their respective inceptions through July 2014, and contemporaneous daily, weekly and monthly levels of the S&P 500 Index from 10 months before the earliest ETF inception through July 2014, we find that: Keep Reading

Investing in Producing Real Estate

Is producing real estate (farmland, timberland, energy delivery infrastructure and commercial properties) a good investment? In his May 2013 paper entitled “The Performance of Direct Investments in Real Assets: Natural Resources, Infrastructure and Commercial Real Estate”, Martijn Cremers investigates the performance of direct investments in natural resources (farmland and timberland), energy infrastructure Master Limited Partnerships (MLP) and commercial real estate. He considers return, risk‐return trade‐off, downside risk, diversification benefits relative to U.S. stocks and U.S. Treasury bonds, exposure to stock market shocks and inflation hedging power. Data for natural resources and commercial real estate investments are voluntarily reported by members (mostly pension funds) of a U.S. trade association. These data include property management fees. Data for energy infrastructure investments are based on the Alerian MLP Infrastructure Index, reflecting the performance of 25 publicly traded MLPs. Using quarterly and annual investment performance data during 1978 through 2012 for real estate and monthly data during 1996 through 2012 for energy infrastructure, he finds that: Keep Reading

Home Prices and the Stock Market

Homes typically represent a large fraction of investor wealth. Are there reliable relationships between U.S. home prices and the U.S. stock market? For example, does a rising stock market stimulate home prices? Do falling home prices point to offsetting liquidation of equity positions. Do homes effectively diversify equity holdings? Using quarterly levels of Robert Shiller’s Nominal Home Price Index and the S&P 500 Index from the end of 1952 through March 2013 (about 60 years), and annual median sales prices for existing homes from RealEstateABC.com and the National Association of Realtors spanning 1968 through 2012 (45 years), we find that: Keep Reading

Simple Tests of RWX as Diversifier

A subscriber suggested testing the diversification power of SPDR Barclays International Real Estate (RWX) as a distinct asset class. To check, we add RWX to the following mix of asset class proxies (the same used in “Simple Asset Class ETF Momentum Strategy”):

PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 1000 Index (IWB)
iShares Russell 2000 Index (IWM)
SPDR Dow Jones REIT (RWR)
iShares Barclays 20+ Year Treasury Bond (TLT)
3-month Treasury bills (Cash)

First, per the findings of “Asset Class Diversification Effectiveness Factors”, we measure the average monthly return for RWX and the average pairwise correlation of RWX monthly returns with the monthly returns of the above assets. Then, we compare cumulative returns and basic monthly return statistics for equally weighted (EW), monthly rebalanced portfolios with and without RWX. We ignore rebalancing frictions, which would be about the same for the alternative portfolios. Using adjusted monthly returns for RWX and the above nine asset class proxies from April 2007 (first return available for RWX) through April 2013 (73 monthly returns), we find that: Keep Reading

Predicting Returns on Real Estate

Are returns on real estate usefully predictable? In the June 2012 version of their book chapter entitled “Forecasting Real Estate Prices”, Eric Ghysels, Alberto Plazzi, Walter Torous and Rossen Valkanov examine the evidence of predictability in U.S. residential and commercial real estate markets. They review methodologies used in constructing widely used real estate price indexes. They then survey the key empirical findings from academic studies of short-run momentum and long-run reversals in real estate returns. Finally, they test the ability of different variables (past stock market return, stock market dividend yield, 3-month Treasury bill (T-bill) yield relative to its 12-month moving average, inflation rate, term spread between 5-year and 3-month maturities, combination of forward interest rates and industrial production growth) to predict real estate returns as calculated from several price indexes and a real estate investment trust (REIT) index. Using monthly and quarterly index levels for the real estate market proxies and values for the predictive variables as available, focusing on 1991 through 2010, they find that: Keep Reading

A Few Notes on How to Buy Real Estate Overseas

Kathleen Peddicord, publisher of the Live and Invest Overseas group, opens her 2013 book, How to Buy Real Estate Overseas, by stating: “The idea of diversifying your investments, your assets, your life and your future overseas can seem frightening, intimidating, even paralyzing. Could you really do it? Yes, you could. I say that based on 30 years of experience at this.” The book takes the perspective of a U.S. citizen seeking to diversify assets via direct ownership of non-U.S. real estate. Using examples based on her experience investing in real estate in 20 countries and operating businesses in seven, she concludes that: Keep Reading

Accounting for Illiquid Assets

How should investors view illiquid assets? In the January 2013 draft of his book chapter titled “Illiquid Asset Investing”, Andrew Ang summarizes the characteristics of investments in illiquid assets. Illiquid investments typically exhibit infrequent trading, small trades (in terms of number of units) and low turnover. Examples are hedge funds (to some degree), real estate and aesthetic investments such as art and jewels. He does not address the largest illiquid component of an individual’s wealth, human capital. Based on available research, he concludes that: Keep Reading

“Real” Assets and Inflation

Which asset class best hedges inflation? In the September 2012 draft of his book chapter entitled “‘Real’ Assets”, Andrew Ang examines the behaviors of the following assets commonly thought to hold their value during times of high inflation (“real” assets): inflation-linked bonds, commodities, real estate and U.S. Treasury bills (T-bill). He focuses on inflation as year-over-year change in the U.S. Consumer Price Index for all urban consumers and all items, but considers also inflation rates for medical care and higher education. He distinguishes inflation hedging (measured by correlation of returns and inflation) from long-run asset class performance. Using asset class proxy returns and U.S. inflation rates as available through 2011, he finds that: Keep Reading

REIT Value Premium?

Are valuation metrics for Real Estate Investment Trusts (REIT) useful indicators of future returns? In his June 2012 paper entitled “Modern Portfolio Theory as Applied to REITs”, Jeffrey Kerrigan evaluates the value premium among REITs. At the end of each month, he reforms equally weighted portfolios of the fifths (quintiles) of REIT stocks with the highest and lowest book-to-market price ratios and calculates the returns of these portfolios over the next month. He estimates the REIT value premium based on the difference in performance between these two portfolios. Using monthly returns for 93 REITs as available during December 1995 through March 2012, he finds that: Keep Reading

Moving Averages and REIT Indexes

Does timing based on simple moving averages (SMA) work for U.S. Real Estate Investment Trust (REIT) indexes? If so, which moving average is best? In his March 2012 paper entitled “The Market Timing Power of Moving Averages: Evidence from US REIT Indexes”, Paskalis Glabadanidis tests the effectiveness of SMAs for timing ten value-weighted and ten similar equal-weighted U.S. REIT indexes. A monthly close above (below) its SMA signals investment in the REIT index (cash, estimated as the 30-day U.S. Treasury bill yield) the next month. He focuses on a 24-month SMA, but includes robustness tests based on 6-month, 12-month, 36-month, 48-month and 60-month SMAs. He applies baseline one-way trading frictions of 0.5% for entering and exiting a REIT index. Using monthly value-weighted and equal-weighted levels of ten U.S. REIT indexes during 1980 through 2010 (31 years), he finds that: Keep Reading

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