In mid-2009 we asked whether real estate investment trust ETFs
had priced in a predicted tidal wave of commercial real estate
foreclosures. We concluded prices had fallen so far they could
well be at fair market value.
Those prices were fair indeed. REITs have nearly doubled in
the past year. How did they do it? On the one hand, investors
flocked to their steady dividends which compare favorably to
anemic bond yields. On the other hand, REITs were able to shed
problem properties and grab properties at distressed prices,
heightening their appeal.
Major broad market REITs all gained ground:
The funds above are iShares Cohen & Steers Realty Majors
ETF (NYSEArca:ICF) at 0.35% fees and iShares Dow Jones US Real
Estate ETF (NYSEArca: IYR) at 0.48% Vanguard REIT ETF (
VNQ
) with a phenomenal 0.12% annual expense ratio.
Despite stellar recent returns, economic fundamentals for the
industry remain precarious. According to a report by the
Congressional Oversight Panel, commercial property values have
fallen 40 percent on average since 2007. Over $1.4 trillion in
commercial loans will come up for refinancing by 2014, and nearly
half of those are underwater, according to the report. Vacancy
rates range from eight percent for multifamily housing to 18
percent for office buildings. Owners have scrambled to fill space
by dropping rents 40 percent for office space and 33 percent for
retail space. Wall St. creations could fare the worst. Deutsche
Bank estimates that two thirds of commercial mortgage-backed
securities will fail to roll over in the next few years.
Banks will no doubt ask for more equity from owners at
refinancing time, but commercial owners will not hesitate to walk
away if pressed too hard. If they walk in sufficient numbers,
more fire sale pricing will follow. Nor are cheap Federal Reserve
funds rates helping. Banks are charging hefty spreads over Fed
rates to help recoup losses. With higher carrying costs, property
buyers must lower their offers.
The healthiest REITs are reinventing themselves as distressed
asset funds by raising more cash. This has attracted
institutional and high net worth investors eager to get in at the
bottom of the cycle. REITs almost look like hedge funds with good
prospects, transparency, and low fees. Inflation, if it comes on
the heels of interest rate hikes, should work to REITs' favor. If
the dollar devalues, hard assets will increase in dollar
terms.
A long-term view of REITs is valuable. It shows how the asset
class is now back to five-year old valutations and illustrates
just how big the bubble was:
Other broad market US REIT ETFs include:
- iShares FTSE EPRA/NAREIT North America ETF
(NasdaqGM:IFNA); 0.48% annual fees
- First Trust S&P REIT ETF (
FRI
); 0.70% fees
- iShares FTSE NAREIT Real Estate 50 ETF (NYSEArca:FTY);
0.48%
- iShares FTSE EPRA/NAREIT North America ETF (NasdaqGM:IFNA);
0.48% annual fees
- First Trust S&P REIT ETF (
FRI
); 0.70% fees
- iShares FTSE NAREIT Real Estate 50 ETF (NYSEArca:FTY);
0.48%
iShares FTSE EPRA/NAREIT North America ETF (NasdaqGM:IFNA);
0.48% annual fees
First Trust S&P REIT ETF (
FRI
); 0.70% fees
iShares FTSE NAREIT Real Estate 50 ETF (NYSEArca:FTY);
0.48%
Picking the right sub-sector clearly can make a difference.
Sub-sector ETFs of the above chart include:
- iShares FTSE NAREIT Industrial/Office ETF (NYSEArca:FIO);
0.48% annual fees
- iShares FTSE NAREIT Mortgage ETF (NYSEArca:REM);
0.48%
- iShares FTSE NAREIT Residential ETF (NYSEArca: REZ);
0.48%
- iShares FTSE NAREIT Retail ETF (NYSEArca:RTL) ;0.48%
- iShares FTSE NAREIT Industrial/Office ETF (NYSEArca:FIO);
0.48% annual fees
- iShares FTSE NAREIT Mortgage ETF (NYSEArca:REM); 0.48%
- iShares FTSE NAREIT Residential ETF (NYSEArca: REZ);
0.48%
- iShares FTSE NAREIT Retail ETF (NYSEArca:RTL) ;0.48%
iShares FTSE NAREIT Industrial/Office ETF (NYSEArca:FIO);
0.48% annual fees
iShares FTSE NAREIT Mortgage ETF (NYSEArca:REM); 0.48%
iShares FTSE NAREIT Residential ETF (NYSEArca: REZ);
0.48%
iShares FTSE NAREIT Retail ETF (NYSEArca:RTL) ;0.48%
Going international is attractive at times because it dampens
volatility and protects against dollar devaluation. Choices
include:
- First Trust FTSE EPRA/NAREIT Global Real Estate ETF
(NYSEArca:FFR); 0.6% annual fees
- iShares FTSE EPRA/NAREIT Asia ETF (NasdaqGM:IFAS); 0.5%
fees
- iShares FTSE EPRA/NAREIT Europe ETF (NasdaqGM:IFEU) 0.48%
fees
- iShares FTSE EPRA/NAREIT Global Real Estate ex-US ETF
(NasdaqGM:IFGL); 0.48% fees
- iShares S&P World ex-US Property ETF (NYSEArca:WPS);
0.48% fees
- WisdomTree International Real Estate ETF (
DRW
); 0.58%
- First Trust FTSE EPRA/NAREIT Global Real Estate ETF
(NYSEArca:FFR); 0.6% annual fees
- iShares FTSE EPRA/NAREIT Asia ETF (NasdaqGM:IFAS); 0.5%
fees
- iShares FTSE EPRA/NAREIT Europe ETF (NasdaqGM:IFEU) 0.48%
fees
- iShares FTSE EPRA/NAREIT Global Real Estate ex-US ETF
(NasdaqGM:IFGL); 0.48% fees
- iShares S&P World ex-US Property ETF (NYSEArca:WPS);
0.48% fees
- WisdomTree International Real Estate ETF (
DRW
); 0.58%
First Trust FTSE EPRA/NAREIT Global Real Estate ETF
(NYSEArca:FFR); 0.6% annual fees
iShares FTSE EPRA/NAREIT Asia ETF (NasdaqGM:IFAS); 0.5%
fees
iShares FTSE EPRA/NAREIT Europe ETF (NasdaqGM:IFEU) 0.48%
fees
iShares FTSE EPRA/NAREIT Global Real Estate ex-US ETF
(NasdaqGM:IFGL); 0.48% fees
iShares S&P World ex-US Property ETF (NYSEArca:WPS);
0.48% fees
WisdomTree International Real Estate ETF (
DRW
); 0.58%
While not a REIT ETF, PowerShares Dynamic Building &
Construction Portfolio ETF (
PKB
), which contains mostly firms serving the housing industry
though no actual builders.
Two interesting trader's tools are expected in Q2 of 2009:
- MacroShares Major Metro Housing Down ETF (NYSEArca:DMM);
1.25% fees
- MacroShares Major Metro Housing Up ETF (NYSEArca:UMM);
1.25%
- MacroShares Major Metro Housing Down ETF (NYSEArca:DMM);
1.25% fees
- MacroShares Major Metro Housing Up ETF (NYSEArca:UMM);
1.25%
MacroShares Major Metro Housing Down ETF (NYSEArca:DMM);
1.25% fees
MacroShares Major Metro Housing Up ETF (NYSEArca:UMM);
1.25%
They track S&P/Case-Shiller Indexes of residential housing
in 10 major US metro areas.
Investors who want to add an active element to their strategy
should look to PowerShares Active U.S. Real Estate ETF
(NYSEArca:PSR), costing 0.8% in annual fees. PSR uses
quantitative and statistical models to try to beat the FTSE
NAREIT Equity REITs Index, and it generally makes changes once a
month. This is basically the same as a fundamental, semi-active,
or intelligent ETF and is worlds away from subjective individual
stockpicking.
Finally, traders can make directional, leveraged short-term
bets on REITs with:
- ProShares Ultra Real Estate ETF (
URE
); 0.95% annual fees
- ProShares UltraShort Real Estate ETF (
SRS
); 0.95% fees
- ProShares Ultra Real Estate ETF (
URE
); 0.95% annual fees
- ProShares UltraShort Real Estate ETF (
SRS
); 0.95% fees
ProShares Ultra Real Estate ETF (
URE
); 0.95% annual fees
ProShares UltraShort Real Estate ETF (
SRS
); 0.95% fees
Co-founder of indexfunds.com, author of two books on
investing, and founder of ETFzone.com, Will has been writing on
indexing issues for 8 years. He holds an MBA from the
University of Texas at Austin.
Co-founder of indexfunds.com, author of two books on
investing, and founder of ETFzone.com, Will has been writing on
indexing issues for 8 years. He holds an MBA from the University
of Texas at Austin.