Mutual Funds/DEVELOPING MARKETS VS. EUROPE and PACIFIC
QUESTION: Is there ever a time to place REITS in a taxable account? Also do U.S. reits move together with the international reits and therefore are too correlated to put into an IRA? I`ve been searching everywhere for this answer as I want to allocate correctly.
ANSWER: Hi. The time you would place REITs in a taxable account vs IRA would be if your tax situation is such that the income tax you pay on the income distributed from the REIT would not impact the return in such a way that prevents it from being a good investment. This could be due to being in a low tax bracket or if you have other losses that an be used in the given year to offset income. The other situation that comes to mind is if you thought the REIT would increase a lot in value resulting in the gains on the sale being taxed at capital gains rates vs ordinary income when drawn from the IRA. In regards to your other question, although US and foreign REITs can be somewhat correlated at times, generally speaking, it can make sense to own both for diversification reasons. I hope this helps.
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QUESTION: If the TOTAL STOCK MARKET INDEX FUND (VTSAX) is 100% what would be the correlation numbers for VNQ (American real estate) and VNQI (foreign real estate)? Are there any other asset classes that these reits would be more correlated to and if so what are they? I will thank you in advance for your usual prompt reply.
ANSWER: Hi. Without having one of my research advisors run the specific correlations, I cant give you an exact answer. Plus, I would need to know what time periods you want to measure. Its a difficult question however since RE was very correlated around the globe after the 2008 - 2009 crisis so you would need to look beyond this for longer term correlations. With that being said, I estimate the correlations to be around .70. In regards to your question about RE and the correlation to other assets classes, REITs have a tendency to be most closely correlated to small value stocks. I hope this helps.
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QUESTION: I noticed that some advisors recommended the Developing Markets (VDMAX) and some individuals recommend the components Europe (VEUSX) and Pacific (VPADX). I have noticed that the funds generally move in the same direction but there are differences. Now, at this time the European market has lagged in performance. What is your opinion? Again, I will thank you for your prompt response.
Hi. The reasoning the funds have a tendency to move in the same direction at times has to do with macro events that are perceived to impact all international economies the same (note how I said "perceived" as perception vs reality is often times what moves the markets). More recently, the Europe fund has lagged due to economic issues that are specific to Europe and the Euro (i.e. risk of Euro crisis). In the end, whether you invest in the Developing mkts fund or the Euro Fund in combination with the Pacific fund, the performance difference will be driven by how you allocate your investment dollars between the Euro and Pacific fund.
I am not sure what you are trying to accomplish, however, you could also take a look at the Total International fund combined with an Emerging markets fund, as this would give you better overall international exposure. I hope this helps.