The U.S. Real Estate Investment Trust (REIT) industry has
managed to surge so far in 2012, driven by strengthening
fundamentals for commercial real estate and an improving outlook
for the U.S. economy despite some recent doubts. The uptrend
further suggests that economic growth was broadening across sectors
and it is indicating to some that a higher probability of a firmer
foundation for future economic expansion (
Real Estate ETFs: Unexpected Safe Haven
Equity prices moved northwards as geopolitical noise remained
relatively benign with a controlled restructuring of Greek debt and
additional liquidity provided to European banks, thereby reducing a
potential threat to the global financial system.
Meanwhile closer to home, the Fed maintained a low rate of
interest and even promised to keep it there through late 2014 to
sustain the economic recovery. With expected GDP growth of around
2% in 2012, positive vibes were emanating from the overall economic
landscape. Employment data was also encouraging, with an average
monthly gain of 226,000 for the first quarter of the year.
However, with escalation of the European debt crisis and
emerging signs of economic weakness all over the world, average
employment growth dropped to a mere 75,000 per month during the
second quarter of 2012 (
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). This held back the growth momentum to some extent, as
speculation of a worsening sovereign debt crisis in Europe weighed
Nevertheless, the U.S. REIT industry outperformed the broader
equity market in the first half of 2012. The FTSE NAREIT All Equity
REIT Index reported total returns of 16.11% as of July 2, 2012 vs.
13.28% and 8.58% for the NASDAQ Composite and the S&P 500
A combination of factors has helped the listed REIT sector to
stand out and gain critical mass over the past 15 to 20 years, the
most notable among them being a healthy dividend payout. Total
returns of 16.11% for the FTSE NAREIT All Equity REIT Index in the
first half of 2012 included a share price return of 14.12%.
High Yield Destination
Investors looking for high dividend yields have historically
favored the REIT sector. Solid dividend payouts are arguably the
biggest enticement for REIT investors as U.S. law requires REITs to
distribute 90% of their annual taxable income in the form of
dividends to shareholders. The dividend yield for the FTSE NAREIT
All Equity REIT Index as of July 2, 2012 was 3.25%, compared to
1.58% for the 10-year U.S. Treasury Note. (
Do ex-Financial Funds Make Safer Dividend ETFs?
Moreover, according to data from NAREIT, the debt ratio of
equity REITs (total industry debt as a percentage of its total debt
and equity market capitalization) as of December 31, 2011 was 38.6%
-- significantly lower than 51% at the end of the second quarter
2008, which was prior to the Lehman Brothers collapse and the start
of the 'Great Recession.'
However, given the positive note in investor sentiment, a number
of factors thwart the otherwise positive market scenario. As it is
a presidential election year, chances are high that the U.S.
policymakers will refrain from making any radical changes on key
With political uncertainty persisting until at least the
elections are over, investors might play a 'wait and see' game
before committing on better investment opportunities. This could,
in turn, put a ceiling on equity returns in the latter half of
Furthermore, the strategic move to focus on austerity measures
among European countries could impede regional economic growth,
leading to a dearth of investor confidence in the European
financial and fiscal system.
In addition, economic growth in emerging markets, particularly
the BRIC countries, is expected to moderate from recent years,
driven by a relative weakness in the developed world and related
uncertainties in the global business climate. All these factors
could cumulatively lead to an equity market headwind in the
remainder of 2012.
In a nutshell, the long-term prospect of the REIT industry looks
favorable with a mild cautionary note. Investors who want play in
this slice of the market in the ETF form have the following options
available, any of which could be interesting ways to target this
increasingly important slice of the market:
Vanguard REIT ETF (
VNQ is one of the most popular ETFs in the real estate space (
Is ROOF a Better Real Estate ETF?
). It trades with the volume level of more than one million shares
a day and with an asset base of $27.3 billion. It provides exposure
to a basket of 111 stocks.
The fund appears to be moderately diversified as 46.2% of asset
base is invested in the top 10 holdings. Among individual holdings,
Simon Property Group Inc takes the top spot with an asset
investment of 11% while Public Storage and Equity Residential
occupy the other two spots with 5% and 4.4% of the assets,
For this exposure, the fund charges an expense ratio of 10 basis
points annually. The fund has delivered a return of 11.8% over a
period of one year and has a solid yield of 3.24%.
Dow Jones U.S. Real Estate Index Fund (
IYR is another popular ETF in the real estate space. This ETF
provides liquidity to the investors trading with the volume level
of more than three million shares a day and an asset base of $3.87
The fund manages a basket of 85 real estate companies with 41.8%
of asset base invested in the top 10 holdings. Among individual
companies, Simon Property Group takes the top spot with a share of
9.07% while American Tower Corp and Public Storage occupy the
second and third positions with an asset investment of 5.34% and
Among sector holdings, Specialty REIT, Retail REIT and
Industrial REIT take the major chunk of the asset base collectively
having a share of 68.03%.
For this the fund charges an expense ratio of 47 basis points,
putting it in a decent position in terms of total costs. Over a
period of one year, the fund delivered a return of 10.29% with a
dividend yield of 3.39%.
Cohen & Steers Realty Majors Index Fund (
ICF tracks the Cohen & Steers Realty Majors Index, offering
exposure to about 31 firms in total while paying out 2.7% to
investors in 30 Day SEC Yield terms. Expenses and volume are in the
middle, as costs come in at 35 basis points and volume is at 0.3
million shares a day.
Among individual companies, Simon Property Group takes the top
spot with a share of 7.9% while Public Storage and HCP Inc take the
second and third positions with respective shares of 7.04% and
6.54%. Large caps still dominate from a cap perspective, while
blend and value take the bulk of assets from a style
Over a period of one year, the fund delivered a return of
Dow Jones REIT ETF (
This ETF tracks the Wilshire REIT Index which follows companies
that operate commercial real estate properties across the country (
Time for a Commercial Real Estate ETF?
). The product utilizes a float-adjusted market capitalization
technique and charges investors 25 basis points a year in fees for
In terms of yield, the product pays out about 3.01% in 30 Day
SEC yield terms while trading volumes are quite robust. With
average volume of over 1.5 million shares, the product has tight
bid ask spreads as well, giving it low overall total costs.
Overall, the product holds 85 securities in total, including an
11.6% weighting to Simon Property Group while Public Storage and
HCP Inc get shares of 5.1% and 4.8%, respectively.
Over a period of one year, the fund delivered a return of
iShares FTSE NAREIT Mortgage REIT ETF (
In another real estate sector play, investors can consider REM.
The fund's dividend will be extremely tough to beat as the product
currently has a 30 Day SEC Yield of 12.2%. The fund trades at the
volume level of 815,800 shares a day and with an asset base of
$722.4 million. The fund charges an expense ratio of 48 basis
points a year.
However, the product provides a very narrow exposure profile to
real estate stocks holding a basket of 29 companies in total. Also,
in this holding of 29 stocks, 74.15% of asset base goes to the top
10 holdings suggesting a high level of company specific risk (
Three ETFs With Incredible Diversification
Among individual holdings, Annaly Capital Management and
American Capital Agency Corp collectively account for 38.2% while
among other companies, the fund does not invest more than 5.56%.
For this, the fund charges an expense ratio of 48 basis points
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ISHARS-REALTY M (ICF): ETF Research Reports
ISHARS-DJ REAL (IYR): ETF Research Reports
ISHARS-F N MTG (REM): ETF Research Reports
SPDR-DJ W REIT (RWR): ETF Research Reports
VIPERS-REIT (VNQ): ETF Research Reports
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