If you saw the Barron's cover this week, then you know what I'm
talking about. According to the article, home prices are on the
rise, and this time it's not due to temporary tax cuts, as we saw
between 2009 and 2010.
As an example, the S&P/Case-Shiller Composite 20-City Index
has shown a 4.1 percent increase in home prices since December.
Meanwhile, the National Association of Realtors' chief economist
Lawrence Yun said he expects the "current forecast for median
existing home prices to rise from 4.5 to 5 percent this year and
about 5 percent in 2013, which is somewhat stronger than historic
norms because of the inventory shortfall."
The inventory shortfall he's talking about is the direct effect
of real estate purchases by investment buyers, who often turn such
properties into rentals. Investor purchases accounted for 27
percent of all sales in 2011, up 10 percent from 2010. What's more,
half of all recent investment home sales were distressed homes.
Distressed homes, such as those in foreclosure, are sold on the
market at a discount-a double-edged sword for any regular
homebuyer, since homes bought at discount lower property values in
Accompanying the decrease in supply has been an increase in
demand, and analysts point to a shift in homebuyer mentality.
Not so long ago, people were waiting to buy until after prices
fell lower. However, now that prices seem to be picking up, many
don't want to miss the opportunity of owning their first home or
upgrading, particularly because interest rates are at an all-time
If you aren't buying property, you can still tap into the rising
home prices with a carefully chosen ETF.
Currently, there are 14 U.S. real estate ETFs on the market. The
available funds have a broad range of expense ratios and methods of
accessing the sector, so choosing the right ETF is crucial.
REITs, as a rule, come in all shapes and sizes. Thomson Reuters
classified REITs into four groups:diversified, commercial,
residential and specialized.
Unfortunately, most of the ETFs currently on the market invest
50 percent or more in commercial REITs; that is, companies
specializing in office buildings and retail malls.
Still, there are some that have a bit less commercial property.
For example, the iShares FTSE NAREIT Retail Capped (NYSEArca:REZ)
offers the most exposure to residential REITs, with about 50
percent of its portfolio dedicated to such companies.
However, the other half of REZ's portfolio is dedicated to
specialized REITs, mostly in the health care and self-storage
Funds that have about 15-20 percent invested in residential
- The iShares Cohen & Steers Realty Majors Index Fund
- The iShares Dow Jones U.S. Real Estate Index Fund
- The SPDR Dow Jones REIT ETF (NYSEArca:RWR)
- The Vanguard REIT ETF (NYSEArca:VNQ)
- The First Trust S&P REIT Index Fund (NYSEArca:FRI)
- The PowerShares Active U.S. Real Estate Fund
- The Guggenheim Wilshire US REIT ETF (NYSEArca:WREI)
- The iShares FTSE NAREIT Real Estate 50 Index Fund
- The Schwab U.S. REIT ETF (NYSEArca:SCHH)
Meanwhile, the IQ US Real Estate Small Cap (NYSEArca:ROOF) and
the PowerShares KBW Premium Yield Equity REIT (NYSEArca:KBWY) also
invest in residential REITs, with exposure at about 9 percent and 3
Two funds that completely lack residential REITs entirely are
the iShares FTSE NAREIT Industrial/Office Capped Index Fund
(NYSEArca:FNIO) and the iShares FTSE NAREIT Retail Capped Index
Both FNIO and RTL invest in commercial REITs, one with a focus
on office buildings and the other on retail malls and shopping
I should also note that PSR is actively managed, and although it
currently holds only 20 percent in residential REITs, it can
increase this position going forward.
Other Ways To Access Real Estate
Those who aren't satisfied with these choices can choose
alternative ways of benefiting from the recovering housing market,
such as investing in funds that track homebuilders.
Homebuilders funds such as the iShares Dow Jones U.S. Home
Construction (NYSEArca:ITB) and the SPDR S&P Homebuilders ETF
(NYSEArca:XHB) have been doing particularly well recently. ITB is
the top-returning ETF of 2012 so far, returning 58.57 percent, with
XHB at 43.66 percent.
To put those figures into perspective, the two funds are
outperforming the SPDR S&P 500 ETF (NYSEArca:SPY) by 42
percentage points and 28 percentage points, respectively.
Both ETFs reach beyond the narrow definition of homebuilders.
Although ITB's portfolio remains anchored in homebuilders, at 68
percent of total holdings, it expands into home furnishings as well
as home-improvement retailers-subindustries that will surely
benefit from a recovering housing market.
XHB is an equal-weighted option that invests less than 30
percent in homebuilders. The fund instead focuses on companies that
specialize in appliances and housewares, holding well-known retail
names such as Pier 1 Imports and Williams Sonoma.
Both ETFs hold Toll Brothers and NVR, two of the five companies
that Forbes targeted as promising in a real estate rebound.
A third option exists for those who are still looking:mortgage
REITs, broadly defined as companies that invest and own property
mortgages. The three options available to U.S. investors are the
SPDR S&P Mortgage Finance ETF (NYSEArca:KME), the Market
Vectors Mortgage REIT Income ETF (NYSEArca:MORT) and the iShares
FTSE NAREIT Mortgage Plus Capped Index Fund (NYSEArca:REM).
REM invests in U.S. residential and commercial mortgage REITs,
while MORT invests in U.S. and non-U.S. companies that derive at
least 50 percent of their revenues from mortgage-related
activities. That gives it wiggle room to venture outside the
mortgage REIT space.
Despite their differences in methodology, MORT's and REM's
portfolios are similar in size and type:Both hold 25-30 stocks and
invest over 30 percent of assets in Annaly Capital Management and
American Capital Agency.
Compared with MORT and REM, State Street's KME looks like an
oddball. According to its fact sheet, the underlying index includes
"pure mortgage players, mortgage insurers, and banks and thrifts
that have considerable mortgage loan portfolios in the United
That said, the fund has only 22 percent of its assets invested
in mortgage REITs, while the rest of its portfolio is composed of
property and casualty insurance firms, homebuilders and regional
There are a lot of choices available to ETF investors so, as
always, doing the homework to help determine what best fits your
needs is crucial.
At the time the article was written, the author held a
position in ITB. Contact Ana Kostioukova
at email@example.com. Follow Ana on Twitter
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