I’m always thinking about ways to make the site helpful for more people, and lately I’ve been working on ways to improve the tools for investors outside of the US. Building a site like this is kinda like building a house over time — it’s an ongoing project requiring incremental steps, and sometimes you have to eliminate a key barrier to make room for the next addition.
One roadblock to expanding the portfolio analysis to other countries has been how to handle REITs, as eight portfolios on the site utilize them while the available data applies only to the US market. Well, after a bit of research I’ve determined that the data is actually a lot more useful than I previously realized, and I’ve decided to unlock REITs as an option for other countries in the calculators. Here’s how it works.
Starting today, when you open any of the calculators and change the country setting the Asset Allocation column now includes REITs just like the US version. So, for example, now you can model the performance of the Swensen Portfolio in the UK.
Pretty cool, right?
To fully understand what this portfolio represents, let me take a quick moment to explain the REIT data and the types of funds that will properly track it.
The data itself is actually the exact same data from before, and while the calculators translate the numbers to local currency and inflation the underlying returns are for US REITs. So in the above example, the best index fund to track the displayed REIT data would be one that follows the US REIT market.
I’m aware, however, that US REIT index funds are not necessarily widespread outside of the United States which is why I did not include them as an option from the start. A more common choice for non-US investors is a true global REIT fund like the Amundi option in the UK. So how well does a global REIT fund track the known history of the US market? A lot better than you might think.
Is it a perfect match? Of course not. But the returns are in the same general ballpark and close enough for general backtesting purposes, especially for the types of diversified portfolios here on the site with less than 20% in REITs. The measurable tracking error is quite reasonable when scaled down to a small portion of your portfolio and shouldn’t stop you from exploring how REITs can benefit your asset allocation.
Once you dig into the construction of global REIT index funds it quickly becomes evident why the data matches up as well as it does. Like most other global index funds the countries are weighted by the size of their respective markets, and even today the US represents 50-60% of the global REIT market. And it’s also important to understand that the REIT corporate structure is a relatively new invention that was only available in a handful of countries prior to the mid 90’s, which means that global REITs were even more dominated by the US market the longer back you look.
So why not offer a true global REIT data option in addition to a US version to maximize accuracy even more? I’m working on it! But while that will take quite a bit of time to implement, turning on the existing REIT data in the calculators is a simple change that will allow you to start playing around right away. Just remember that REITs are best represented by a US-based REIT index or a true global index and not a REIT index in your local country, and the data should be just fine as-is for general study while I continue to refine it over time.
Adding a reasonable REIT option for other countries will eliminate that barrier I mentioned earlier, so keep your eyes open for some interesting new features in the coming weeks. And in the meantime, I hope you enjoy the new functionality in the calculators.