A Comprehensive Guide to REIT ETFs

For those investors who've lost their appetite for Real Estate Investment Trust (:REIT) stocks, the impact of encouraging economic indicators over the past five months should act as an enticement. After bouncing back from a lackluster 2013, this special hybrid asset class pulled in their capital and scored well on the return book.

As per the National Association of Real Estate Investment Trusts (:NAREIT), the FTSE NAREIT All REITs Index climbed a decent 14.8% against the 5.0% increase in the S&P 500 Index, from January through May. (Read: 3 MLP ETFs for Excellent Income & Growth)

Proving their mettle, REITs are again performing better than other stocks -- a feature that makes their addition to your portfolio a strategic one. Sidestepping interest rate issues and the Fed policy, REITs have shifted their focus to overall economic improvement, demand-supply dynamics and the corresponding impact on the rental rates and occupancy levels.

Even if increase in interest rates hold back the industry’s growth, economic betterment will lead to improved disposable income, higher occupancy levels and rent, rise in property valuation, and finally improvement in total income and dividend level.

As REITs are usually owners and managers of different types of properties (like malls, shopping centers, apartments, offices, hotels, industrial or other facilities), shareholders not only enjoy ownership benefits of the real estate without actually becoming landlords, they also seek opportunities to gain maximum leverage by focusing on the individual market dynamics of these different asset types. (Read: 2 Summer ETFs surging to #1 Ranks)

Economic Activity Picking Up

After a cold snap and contracted growth in the first quarter, the sun is again shining on the economy and consumer optimism is back. Impressive data across manufacturing to employment is raising hopes for the second quarter and rest of the year. (Read: 3 Multi-Asset ETFs for Q3)

With an uptick in consumer confidence (Index reached 85.2 in June, up from 82.2 in May) and consumer spending accounting for over two-third of the U.S. economic activity, we believe this is an opportune moment for those companies that offer real estate support to the sectors which directly benefit from these activities.

On the other hand, as construction is still at a comparatively low level, we foresee limited supply in the near to medium term. And coupled with the uncertainty related to interest rate hike, we expect the REIT industry to be on a roll. (Read: 4 Overlooked ETFs with double digit yields)

Dividends Still Key Attraction

In addition to capital appreciation, yield-hungry investors continue to have a large appetite for REIT stocks as the U.S. law requires these to distribute 90% of their annual taxable income in the form of dividends to shareholders. This unique feature made the REIT industry stand out and gain a solid footing over the past 15–20 years.

As of May 30, the dividend yield of the FTSE NAREIT All REITs Index was 3.97%. The yield of the FTSE NAREIT All Equity REITs Index was 3.49% while the FTSE NAREIT Mortgage REITs Index yielded 9.55%. Clearly, the REITs continued to offer solid yields and outpaced the 2.01% dividend yield offered by the S&P 500 as of that date.

Capital Access

Accessibility to capital is a prime factor in the REIT industry and the recent capital market activities gives cues of a rise in investor confidence in this sector and their willingness to pour in their hard earned money into it. As of May 30, REITs raised $27.7 billion through debt and equity capital offerings.

Also, 2013 was notable from this angle with listed REITs raising a total of $76.96 billion compared with $73.33 billion in the prior year. The increase was backed by a solid IPO market last year.

Exploring the Sector through ETFs

In this environment, we believe this is the right time to explore the sector through ETFs so as to reap the benefits in a safer way. (see all Real Estate ETFs here) Considering the prospects for return from dividend income and capital appreciation, we have tracked the following REIT ETFs, which could be worth considering:

Vanguard REIT ETF (VNQ)

The fund, launched in 2004, seeks investment results by tracking the performance of the benchmark – MSCI US REIT Index – which is used to gauge real estate stocks. The fund consists of 137 stocks, which acquire office buildings, hotels, and other real property. The top three holdings are Simon Property Group Inc. (SPG), Public Storage (PSA) and Equity Residential (EQR). It charges 10 basis points in fees (as of May 27, 2014). VNQ has managed to attract $42.9 billion in assets under management till May 31, 2014.

iShares U.S. Real Estate ETF (IYR)

Launched in 2000, IYR follows the Dow Jones U.S. Real Estate Index that measures the performance of the real estate industry of the U.S. equity market. The fund comprises 101 stocks with top holdings including Simon Property Group Inc., American Tower Corporation (AMT) and Crown Castle International Corp. (CCI).

The fund’s expense ratio is 0.46% (as of Apr 30, 2014) and the 12-month trailing yield is 3.58% (as of May 31, 2014). It has nearly $5.0 billion in assets under management as of Jun 26, 2014.

SPDR Dow Jones REIT ETF (RWR)

Functioning since 2001, RWR seeks investment results of the Dow Jones U.S. Select REIT Index. The fund consists of 91 stocks that have equity ownership and operate commercial real estate, with the top holdings being Simon Property Group Inc., Public Storage and Equity Residential. The fund’s expense ratio is 0.25% (as of Jun 27, 2014) and dividend yield is 3.05% (as of Jun 25, 2014). RWR has about $2.6 billion in assets under management (as of Jun 25, 2014).

Schwab US REIT ETF (SCHH)

This fund debuted in 2011 and tracks the total return of the Dow Jones U.S. Select REIT Index. The fund consists of 92 stocks that own and operate commercial real estates. The top three holdings are Simon Property Group Inc., Public Storage and Equity Residential. It charges 7 basis points in fees (as of May 31, 2014), while the trailing twelfth month distribution yield is 2.33%. SCHH boasts $982.2 million in assets under management (till May 31, 2014).

First Trust S&P REIT Index Fund (FRI)

Launched in May 2007, FRI is an ETF that seeks investment results of the S&P United States REIT Index that gauges the U.S. REIT market and retains consistency, which depicts the overall market composition. The fund comprises 145 stocks with the top holdings being Simon Property Group Inc., Public Storage and Equity Residential. The fund’s net expense ratio is 0.50% (as of Dec 31, 2013) and the 12-month distribution rate is 2.65% while index yield is 3.69% as of May 30, 2014. FRI has about $256.4 million in net assets under management (as of Jun 25, 2014).

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