These are unusual times for the U.S Real Estate Investment
Trust (REIT) industry. After a remarkable run in the first four
months of the year, the REIT industry has nosedived since May,
and the volatility continues.
Prior to the recent uptrend in interest rates, the demand for
these high-dividend-paying stocks remained sky high due to
ultra-low interest rates. In 2012, the industry delivered a solid
performance, beating the broader equity market for the 4th
straight year. (Read:
3 Top Ranked ETFs for Earnings Season
However, with the increasing yields on the U.S. Treasury 10-year
note (2.72% as of July 5, 2013, compared with 1.68% at the end of
April), investors are turning their focus away from REITs
(primarily the mortgage REITs, commonly known as mREITs).
Moreover, the rising interest-rate environment is a growing
concern for REIT stocks as investors are concerned about the
negative impact on book values and financing costs.
In May, on a total return basis, the FTSE NAREIT All REITs Index
lost 6.56% and the FTSE NAREIT All Equity REITs Index lost 5.90%
compared with the S&P 500 that gained 2.34%. (Read: 6
ETFs beating the market over the past year
The June data looks disappointing as REITs were down 2.9%,
according to the FTSE NAREIT U.S. REIT Index data. In the first
half of the year, the total return from the FTSE NAREIT All
Equity REITs Index was 5.8%, compared with the return of 13.2%
from S&P 500.
Dividends Still Remain an Attraction
With the U.S. law requiring REITs to distribute 90% of their
annual taxable income in the form of dividends to shareholders,
yield-seeking investors continue to prefer these stocks. This has
aided the industry to stand out and gain a strong foothold over
the past 15-20 years.
As of May 31, the dividend yield of the FTSE NAREIT All REITs
Index was 4.19%, and the dividend yield of the FTSE NAREIT All
Equity REITs Index was 3.35%. Moreover, the dividend yield
of the FTSE NAREIT Mortgage REITs Index was 12.55% as of that
date compared with 2.14% for the S&P 500. (Read: B
uy these ETFs for brighter insurance sector
Accessibility to capital is a prime factor in the REIT Industry.
After raising capital worth $51.3 billion in 2011 and a total of
$73.3 billion in 2012, REITs raised $45.5 billion in the first
six months of 2013.
During the latest downturn, REITs were able to acquire premium
properties from highly leveraged investors at heavy discounts.
Furthermore, REITs typically have a large unencumbered pool of
assets, which could provide an additional avenue to raise cash
during crisis. These assets, in turn, have provided the requisite
wherewithal to the REIT industry to grow through strategic
acquisitions over time.
For the sector as a whole, rising interest rates are a looming
concern. High capital costs erode their profit level and hence
trigger a fall in the dividend yield that the investors primarily
look for while investing in REIT stocks.
Yet, though the macroeconomic issues and the political
situation have been affecting the market, we believe that with
the economic recovery gaining momentum, rents and occupancies
would improve further.
Moving forward, limited supply of new construction coupled
with the growing demand for premium properties bode well for the
REITs, in particular for those that have assets in high
Exploring the Sector through
Keeping that in mind, we believe this is the right time to
explore the sector through ETFs so as to reap the benefits in a
safer way amid the current volatility and the unusual market
Therefore, with a low-cost investment choice, the prospects
for return from dividend income and capital appreciation as well
as focus on spreading out assets among various companies and
reduce company specific risk, we have tracked the following REIT
ETFs, which could be attractive picks:
Vanguard REIT ETF
Launched on Sep 23, 2004, VNQ tracks the performance of MSCI
US REIT Index. The fund consists of 126 stocks, which acquire
office buildings, hotels, and other real property. The top three
Simon Property Group Inc.
It charges a low 10 basis points in annual fees and has
managed to attract about $18 billion in assets under management
iShares U.S. Real Estate ETF
Launched on Jun 12, 2000, IYR follows the Dow Jones U.S. Real
Estate Index.The fund comprises 96 stocks with top holdings
including Simon Property Group Inc.,
American Tower Corporation
(AMT) and Public Storage.
The fund's expense ratio is 0.45% and the 12-month yield is
3.80%. It has about $4 billion in assets under
SPDR Dow Jones REIT ETF
Launched on Apr 23, 2001, RWR is an ETF that seeks investment
results of the Dow Jones U.S. Select REIT Index. The fund
consists of 86 stocks that have equity ownership and operate
commercial real estate, with the top holdings being Simon
Property Group Inc., Public Storage and HCP Inc.
The fund's expense ratio is 0.25% and it pays a dividend yield
of 3.03%. RWR has about $2.2 billion in assets under management
as of Jun 28, 2013.
Schwab US REIT ETF
This fund started on Jan 13, 2011 and tracks the total return
of the Dow Jones U.S. Select REIT Index. The fund consists of 87
stocks that own and operate commercial real estates.
The top three holdings are Simon Property Group Inc., Public
Storage and HCP Inc. It charges very low 7 basis points in fees,
while the 12-month distribution yield is 2.30%.
SCHH currently has $553 million in assets under
First Trust S&P REIT Index Fund
Launched on May 8, 2007, FRI is an ETF that seeks investment
results of the S&P United States REIT Index. The fund
comprises 129 stocks with the top holdings being Simon Property
Group Inc., Public Storage and HCP Inc.
The fund's net expense ratio is 0.50% and the 12-month
distribution rate is 2.07%. FRI has about $289 million in net
assets under management.
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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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