Forget US REITs, China Real Estate ETF is Booming

Many investors have been focused in on the American property boom during much of 2012, and for good reason. The space has been surging higher as consumers become more optimistic, the jobs picture slightly improves, and housing prices seemingly bounce off of the bottom.

Top ETFs targeting the home construction industry have been among the best performers in the unleveraged fund world this year, easily crushing their broad benchmarks in the process. Meanwhile, REIT ETFs have also been quite solid in the time period too (see Small Cap Real Estate ETFs: Crushing the Competition).

These funds, which hold securities that buy or manage real estate properties, are all up at least double digits on the year and have been rebounding strongly these past few weeks after a post-election slump. Yet despite how impressive these have been, they have largely overshadowed an even better performer in the real estate market here in 2012, the Chinese Real Estate ETF.

The Guggenheim China Real Estate ETF (TAO - ETF report) has actually been the best performer of the entire real estate group during the trailing twelve month period, beating out the next closest fund by a few basis points, and adding more than 56% in the trailing twelve month period. This comes even in the face of broad concerns over a China slowdown, demonstrating that even with these risks demand for real estate investments in the greater China region is quite strong (see China ETF Investing 101).

However, investors should note that the ETF is heavily focused on Hong Kong as opposed to the Mainland, and that its expense ratio of 0.65% is far higher than other, U.S. focused ETFs in the real estate world. The volume isn’t too great either at about 70,000 shares a day, so total costs could be a bit higher than the stated expense ratio due to a wide bid ask spread.

Still, the product does a great job of spreading out assets as not a single security of the more than 45 in the basket takes up more than 6% of assets. The product is also still trading at a great valuation level as the PE is below 6, while the P/B is south of 1.0, metrics that are far lower than what we see in similar U.S.-centric REIT ETFs (see Is the Panic Over for Mortgage REIT ETFs?).

In fact, (IYR - ETF report), an extremely popular REIT ETF from iShares that zeroes in on U.S. REITs, has a PE above 40 and a P/B above 3. While it does cost less than TAO with better volume, one has to wonder if it is worth being more than five times more richly valued from an earnings perspective.

Furthermore, despite the fact that the ETF targets Chinese securities, many of the firms in the fund qualify as ordinary income. This focus on this type of dividend ensures that no matter what happens with the dividend tax debate in the U.S., TAO will not be too negatively impacted, suggesting that investors can definitely consider it a lower policy risk play, at least in terms of U.S. policies (read No Dividend Tax Debate for these High Yield ETFs).

Given this, TAO could continue to be an interesting, but often overlooked real estate ETF play as we head into 2013. While it has certainly surged this year, it is much more attractive from a valuation perspective than its peers in the American space suggesting that if investors want real estate ETF exposure, TAO could be the way to go in the New Year.

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