A Comprehensive Guide to REIT ETFs - ETF News And Commentary (2024)

A Comprehensive Guide to REIT ETFs - ETF News And Commentary

The year 2013 has been anunusual one for the Real Estate Investment Trust (REIT) industrywith stock prices of this special hybrid asset class seeing bothhighs and lows. Particularly, the concerns surrounding the interestrate environment emanating from the Federal Reserve’s economicstimulus moves kept the industry in the headlines in the secondhalf of the year. (Read: Real Estate ETFs in Focus as rates turnhigher)

And for the first time in five years, the listed U.S. REIT stocks’return underperformed the broader equity market as per the NationalAssociation of Real Estate Investment Trusts (NAREIT). On a totalreturn basis in 2013, the FTSE NAREIT All REITs Index climbed just3.2% compared to the S&P 500’s decent 32.4% run.

Finally, convinced by the consistent pickup in economic activityand labor market improvement, the Fed started tapering its stimulusin December. Further, in January, the Fed cut its monthly bondbuying to $65 billion from $75 billion in December. (Read: 2 RisingETFs with double digit yields)

In spite of this desperate stance taken by the Fed, the economicdata released earlier this year was not as robust as expected.Coupled with the emerging economy woes, the benchmark indices infact became volatile resulting in a soft start to this year.

REITs Back in Focus

In this backdrop, the focus again shifted to REITs, which moreoften than not, tend to perform better when stocks from otherindustries are down. On a total return basis, the FTSE NAREIT AllREITs Index gained 3.4% in January, compared to the S&P 500’sdecline of 3.5%.

Further in February, with increased confidence regarding theeconomic recovery, the FTSE NAREIT All REIT Index climbed 4.7%, anotch higher than the 4.6% gain experienced by S&P 500. (Read:Play rising rates with these ETFs)

While the gradual reduction in the Fed’s support could lead tohigher interest rates in the long run, thereby hurting therate-sensitive business of REITs, we believe that broader marketconcerns will not cart off the prospects of gaining from portfoliodiversification that this distinct asset class offers.

REITs, which basically own and manage income-producing real estate(such as apartments, offices, hotels, industrial or otherfacilities or invest in mortgages or mortgage-backed securitiesattached with properties), let its shareholders enjoy ownershipbenefits of the real estate without actually becominglandlords.

These assets perform differently based on individual marketdynamics. Therefore, investors have the opportunity to gain maximumleverage from the changes seen time to time in performances bythese assets.

Consumer Confidence Growing

A decent GDP report and encouraging U.S. retail data clearlyindicate growing consumer confidence, which is further reinforcedby the Fed’s new-found faith in the economy. However, theConsumer Confidence Index registered a moderate decline in Februaryto 78.1.

With consumer spending accounting for over two-third of the U.S.economic activity, we believe that this is an opportune moment forthose companies that provide real estate support to the sectorswhich directly benefit from these activities. Alongside, with theFed intending to keep the interest rates near zero despite thetapering and until unemployment rate drops below 6.5%, REITs willcontinue to benefit.

Dividends Still Are Key Attraction

Dividends continue to be the key attraction of this industry. Withthe U.S. law requiring REITs to distribute 90% of their annualtaxable income in the form of dividends to shareholders,yield-hungry investors still have a large appetite for such stocks.This has enabled the industry to stand out and gain a footing overthe last 15–20 years.

As of Jan 31, the dividend yield of the FTSE NAREIT All REITs Indexwas 4.16%. The yield of the FTSE NAREIT All Equity REITs Index was3.65% while the FTSE NAREIT Mortgage REITs Index yielded 9.73%.Clearly, the REITs continued to offer solid yields and outpaced the2.09% dividend yield offered by the S&P 500 as of Jan 31.

Capital Access

Accessibility to capital is a prime factor in the REIT industry and2013 has been a notable one from this angle. A total of $76.96billion was raised by listed REITs compared to $73.33 billion inthe prior year. A solid IPO market in 2013 primarily made ithappen.

During the year, 19 IPOs helped in raising a total of $5.71billion, marking the highest amount raised in the largest number ofIPOs since 2004. REITs have further raised $4.4 billion in initial,debt and equity capital offerings in Jan 2014.

Exploring the Sector through ETFs

In this environment, we believe this is the right time to explorethe sector through ETFs so as to reap the benefits in a safer way(See all Real Estate ETFs here). Considering the prospects forreturn from dividend income and capital appreciation, we havetracked the following REIT ETFs, which could be worthconsidering:

Vanguard REIT ETF (VNQ)

The fund, launched over nine years ago, seeks investment results bytracking the performance of the benchmark – MSCI US REIT Index –which is used to gauge real estate stocks. The fund consists of 131stocks, which acquire office buildings, hotels, and other realproperty. The top three holdings are Simon Property GroupInc. (SPG), Public Storage (PSA) andPrologis, Inc. (PLD). It charges 10 basis pointsin fees (as of May 28, 2013). VNQ has managed to attract $35.3billion in assets under management till Jan 31, 2014.

iShares U.S. Real Estate ETF (IYR)

Launched in 2000, IYR follows the Dow Jones U.S. Real Estate Indexthat measures the performance of the real estate industry of theU.S. equity market. The fund comprises 101 stocks with top holdingsincluding Simon Property Group Inc., American TowerCorporation (AMT) and Crown Castle InternationalCorp. (CCI). The fund’s expense ratio is 0.45% (as of Dec31, 2013) and the 12-month yield is 3.65% (as of Jan 31, 2014). Ithas $4.7 billion in assets under management as of Mar 6, 2014.

SPDR Dow Jones REIT ETF (RWR)

Functioning since 2001, RWR seeks investment results of the DowJones U.S. Select REIT Index. The fund consists of 87 stocks thathave equity ownership and operate commercial real estate, with thetop holdings being Simon Property Group Inc., Public Storage andPrologis Inc. The fund’s expense ratio is 0.25% (as of Mar 7, 2014)and dividend yield is 3.06% (as of Mar 5, 2014). RWR has about $2.4billion in assets under management (as of Mar 5, 2014).

Schwab US REIT ETF (SCHH)

This fund debuted in 2011 and tracks the total return of the DowJones U.S. Select REIT Index. The fund consists of 87 stocks thatown and operate commercial real estates. The top three holdings areSimon Property Group Inc., Public Storage and Prologis Inc. Itcharges 7 basis points in fees (as of Feb 28, 2014), while thetrailing twelfth month distribution yield is 2.37%. SCHH boasts$786.7 million in assets under management (till Feb 28, 2014).

First Trust S&P REIT Index Fund (FRI)

Launched in May 2007, FRI is an ETF that seeks investment resultsof the S&P United States REIT Index that gauges the U.S. REITmarket and retains consistency, which depicts the overall marketcomposition. The fund comprises 140 stocks with the top holdingsbeing Simon Property Group Inc., Public Storage and Prologis Inc.The fund’s net expense ratio is 0.50% (as of Dec 31, 2013) and the12-month distribution rate is 2.98% while index yield is 3.97% asof Jan 31, 2014. FRI has about $146.6 million in net assets undermanagement (as of Mar 5, 2014).

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FT-SP REIT IDX (FRI): ETF Research Reports

ISHARS-US REAL (IYR): ETF Research Reports

SPDR-DJ W REIT (RWR): ETF Research Reports

SCHWAB-US REIT (SCHH): ETF Research Reports

VIPERS-REIT (VNQ): ETF Research Reports

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