Returns on real estate have been good for years, but opportunities in the U.S. have shriveled lately. At the same time, real estate -- and increasingly international real estate -- is becoming a more common part of many portfolios. With several real estate ETFs and mutual funds to choose from, going global with your real estate investments has become easier and cheaper. ETFs represent one of the easiest ways to gain broad exposure to an asset class that's not highly correlated to U.S. stock markets and which has performed well lately. The U.S. is not the only real estate market in the world to slow, and other countries might soon face similar situations, serving as a cautionary note for those who think real estate is a panacea for your portfolio.

International real estate ETF investors have only two choices at this point, the SPDR DJ Wilshire International Real Estate Fund (AMEX:RWX), and the WisdomTree International Real Estate Fund (DRW). Fees for both funds are fairly high, at 0.60% for RWX and 0.58% for DRW.

A peek at the indexes which these two funds follow reveals differences in the number of components and the type of companies included in their indexes. RWX follows The Dow Jones Wilshire Ex-U.S. Real Estate Securities Index, a float-adjusted market capitalization weighted index that includes 159 publicly traded real estate securities from outside the U.S. DRW, on the other hand, follows the WisdomTree International Real Estate Sector Index, a fundamentally weighted index that focuses on 222 real estate companies outside the U.S. and Canada that pay regular cash dividends.

Country exposure for both funds is heaviest in Australia, with DRW having the largest weight at 34%, while RWX holds only 20% of its assets down under. The funds then continue the Pacific region theme, with DRW putting 24% of its assets in Hong Kong and RWX holding a 19% position in Japan. For their third largest holding, DRW stays in Asia, with Japan getting an 11% weight and RWX making a break to Europe by placing 16% of its assets in the U.K. 

Since mid-December of 2006, when RWX came to market, it has gathered over $942 million in assets. Total return for the fund since inception is just over 16%. Real estate operating companies make up nearly 37% of the fund, while diversified real estate companies make up another 22%, and regional malls come in at 17.5%.

Top holdings for RWX include the Westfield Group, the world's largest retail property group with shopping centers in Australia, New Zealand, the U.K., and the U.S.; Mitsui Fudosan, the real estate arm of Mitsui & Co., which manages a variety of luxury real estate; and Brookfield Asset Mgmt. (NYSE:BAM), a global asset manager focused on property, power, and infrastructure assets in the Americas and Europe.

Launched in early June 2007, DRW also counts as its largest holding, at 8%, the Westfield Group, which coincidentally has more than half of the malls it owns in the U.S., bringing investors full circle and reducing their diversification efforts. This ETF was created with those interested in dividends in mind, since it follows an index that weights components by their dividends.

Bubble & trouble
Real estate has been a solidly performing asset class over the last few years. Economic growth, especially in Asia, has driven commercial real estate prices up, while real estate markets have also fared well in Europe. For U.S.-based investors, there are good reasons to invest outside of the U.S., since its real estate market is in a slump that may take several years to work itself out. Still, there is no guarantee that the real estate downturn will not show up in other areas of the world. This fact is amply indicated by the U.K., which appears to be headed in a direction similar to the U.S. If the global real estate bubble follows these markets, investors who diversify away from the U.S. could end up hitting the international scene at peak prices. The weak U.S. dollar may also be at a low enough point where it finds a floor or even goes up, which could put even more pressure on international returns. Essentially, U.S. investors could get hit with both a rising currency and falling real estate prices.

In the global real estate crash of 1992, there were few countries that had positive returns. Of course, this crash was linked to the 1980s building frenzy and easy credit, along with lax regulation. With the liquidity flooding markets lately, it is clear that at least one of these ingredients is present today. Although real estate is a very local business, most real estate is likely to feel the pain (to one extent or the other) when the next crash happens. 

Alternative funds
There are several closed-end funds that also offer real estate exposure outside the U.S.. These include: two funds from RMR, the RMR Asia Real Estate Fund and the RMR Asia Pacific Real Estate Fund (AMEX:RAP); the ING Clarion Global Real Estate Fund (AMEX:IGR); and Seligman LaSalle International Real Estate Fund (NYSE:SLS). In May of 2007, Alpine Woods Capital completed the launch of its closed-end fund, the Alpine Global Premier Properties Fund, which raised $2 billion. This fund's successful launch is certainly a great indication of the interest in international real estate. The fund is an extension of Alpine's product line which already included the $1.9 billion Alpine International Real
Estate Equity Fund

Diversification benefits?
Real estate is a sensible way for many investors to diversify their portfolios. In addition, many real estate funds often offer attractive yields. Choosing an international real estate ETF is limited by the number of choices at this time, but that is likely to change, given the demand by investors for product in this area. There are clear differences between the two options. Investors looking for dividends might go with DRW, while those more focused on diversification might select RWX. Living in Miami, where construction cranes and empty condos litter the city, I may be slightly jaded, but for me the peak of real estate in the U.S. is a harbinger of what investors might soon experience globally. I would approach the real estate market as one with opportunities, while keeping an eye out for warning signs that the bubble is about to burst.

Fool contributor Zoe Van Schyndel lives in Miami and enjoys the sunshine and variety of the Magic City. She does not own any of the funds or securities mentioned in this article. The Motley Fool has a disclosure policy.