Real Estate Holding Distinguishes ETF Model Portfolio From Benchmark
by James B. Cloonan
There is little more to say that hasn’t already been said about the stock market. As I write this, the market appears to be stabilizing—but we have been fooled before in this extended downturn.
As you can see in the performance data in Table 1, AAII’s Model ETF Portfolio, at –19.3% year-to-date, is underperforming its benchmark, which is at –11.2% year-to-date (the ETF benchmark is a weighted portfolio that is invested 80% in the iShares Dow Jones U.S. Index and 20% in the iShares MSCI EAFE Index). This underperformance is due largely to our holding in real estate (the iShares Cohen & Steers Realty Majors Fund).
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In our last performance review of the ETF Portfolio (November 2008), the model portfolio was beating the benchmark over various time periods primarily due to this same real estate holding.
And as I write this two weeks after the data in Table 1 was compiled, I notice that during that period, the real estate exchange-traded fund is up over 24%, with our benchmark up just under 8% (versus 14.1% for the Model ETF Portfolio as a whole).
Although the short-term news is positive, 2009 remains a poor year for real estate. But the important point to note is that, regardless of whether real estate leads or lags the rest of the equity market, it moves differently than the market. And this lack of correlation provides risk reduction through diversification over the long term. Our real estate interest is in real estate equity holdings and not in mortgages or other real estate debt.
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