U.S. Markets closed

‘Steady Diet’ of Real Estate ETFs Can Help Boost Yield


Yield is the name of the game for exchange traded fund investors these days. Interest rates are low and many asset classes that usually supply a decent yield have gone lower, causing investors to seek income in unusual areas of the market. REITs, or real estate investment trusts, have managed to fill one of the gaps for income seekers.

“Unlike equities, income-generating real estate has some inflation-hedging qualities because property prices move in line with inflation and nonsticky rents can change as needed. Equity REITs are much more stable than their mortgage REIT cousins, but investors should not be lulled into a false sense of security. REITs are still equities, and not a higher-yielding alternative to low-risk investments. Over the past three years, REITs have been slightly more volatile than the S&P 500,” Abby Woodham wrote for Morningstar.

After the housing market crash of 2008, investors have been slow to dip their toes into the real estate asset class. However, this area of the market is known for high yields currently, and with the housing market turning around, it is looking more and more attractive. Solid dividend payouts are the biggest payoffs for investing in REITs, which deliver 90% of annual taxable income to shareholders, reports Eric Dutram for Zacks. [REIT ETFs to Play Higher Rents]

“Despite vacillation in stock markets, investors haven’t lost their appetite for a steady diet of real estate,” says Jeff Tjornehoj, a Lipper analyst, in the report.

The most-popular REIT ETF, Vanguard REIT Sector ETF (VNQ), which yields 3.26%, has returned 12% this year. The fund has returned an annual 20.4% over the past three years, compared to the broad market SPDR S&P 500 (SPY) up 13% for the same time period, according to Morningstar data. [REIT ETFs Attract Income Hunters]

Investors need to keep in mind that high levels of inflows and rising prices do make REITs less attractive, and the diversification benefits that REITs historically provided have become diluted. Recently, REITs have become more correlated with the equity market, reports Murray Coleman for The WSJ. [Dividend, REIT and High-Yield ETFs For Income]

As more investors become interested in the REIT asset class, the overall sentiment is that the diversification benefits and income yield are still healthy enough to keep an allocation of this asset class within a portfolio.

Other REIT ETFs:

  • iShares Dow Jones U.S. Real Estate Index Fund (IYR) yields 3.27%
  • SPDR Dow Jones ETF (RWR) yields 3.09%
  • iShares FTSE NAREIT Residential Capped Index Fund (REZ) yields 3.26%

Vanguard REIT Sector ETF

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.