|
YOU ARE HERE: ETFs » Our ETF Picks » Real Estate Sector
Barchart.com ETF ResearchBarchart.com's ETF Picks in the Real Estate Sector ETF Research written by the Barchart.com ETF Research Team Last Updated: November 28, 2011 Table of Contents
IntroductionAll of the Exchange-Traded Funds (ETFs) in the Real Estate Industry group hold Real Estate Investment Trust (REIT) securities. A REIT is simply a holding company that owns and usually manages a group of real estate assets, usually focused in a particular sector such as industrial, office, retail, residential, mortgages, and others. REITs provide investors with an easy way to gain access to real estate as an investment class through an equity security listed on an exchange such as the NYSE or Nasdaq. A REIT Exchange-Traded Fund is simply a pool that holds a variety of different REITs, providing an investor with an easy way to obtain diversified exposure to the REIT industry. REITs in their early years were mainly mortgage REITs that held mortgages on commercial or residential properties and that purchased agency mortgage-backed securities. However, more than 80% of REITs are now “equity REITS,” which own and usually manage commercial real estate properties and derive most of their income from rent. There are currently about 134 REITs listed on U.S. exchanges. The REIT is a specialized business entity created by Congress in 1960 that must follow certain IRS rules. A REIT must (1) invest at least 75% of its total assets in real estate, (2) derive at least 75% of its gross income from rents from real property or interest from mortgages on real property, and (3) distribute at least 90% of its taxable income annually to shareholders in the form of dividends. As an example of a REIT, Simon Property Group (SPG) is the largest REIT in the United States with a market capitalization of $36 billion. Simon owns or has an interest in 391 retail real estate properties in North America, Europe and Asia. Simon focuses on owning malls and premium outlet operations, which puts it into the Retail REIT category. Simon Property Group currently pays an annual dividend of $3.60 per share, which equates to a dividend yield of 2.9%. Simon Property Group’s stock is held by many of the real estate ETFs that are described below. REITs typically provide stable dividend returns, making them an attractive choice for investors who are looking for dividend income more than stock appreciation. Over the 1972 through 2010 time frame, REITs provided an average dividend yield of 8.3%, according to the National Association of Real Estate Investment Trusts (NAREIT). Unlike corporations that sometimes build up large cash reserves, REITS are required to distribute at least 90% of their income to shareholders in the form of dividends and many distribute 100% of their income. The REIT industry was hit hard during the 2008 financial crisis as the deep recession hurt occupancy rates in commercial properties and thus reduced rental income. REIT equity prices showed large declines in 2007 and 2008, but then showed large gains in 2009 and 2010. The average dividend yield for the industry fell to around 3% in 2007 and 2008 but recovered to the 5-7% area in 2009 and 2010, according to NAREIT.
U.S. Real EstateVanguard REIT ETF (VNQ) (issuer web site link) – This fund, launched in September 2004, has $8.8 billion in assets under management. The fund has an expense fee of 0.12%. The fund tracks the MSCI REIT Index. The fund holds 106 U.S.-listed equities. The five top holdings are: Simon Property Group (10.4%), Public Storage (5.2%), Equity Residential (4.9%), HCP (4.6%), and Ventas (4.4%). iShares Dow Jones US Real Estate Index Fund (IYR) (issuer web site link) – This fund, launched in June 2006, has $2.9 billion in assets under management. The fund has an expense fee of 0.47%. The fund tracks the Dow Jones U.S. Real Estate Index. The fund holds 82 U.S.-listed equities. The five top holdings are: Simon Property Group (9.4%), Public Storage (4.6%), Equity Residential (4.2%), Annaly Capital Management (4.1%), and HCP (4.0%). iShares Cohen & Steers Realty Majors Index Fund (ICF) (issuer web site link) – This fund, launched in January 2001, has $2.1 billion in assets under management. The fund has an expense fee of 0.35%. The fund tracks the Cohen & Steers Realty Majors Index. The fund holds 31 U.S.-listed equities. The five top holdings are: Simon Property Group (8.7%), Public Storage (7.4%), Equity Residential (6.9%), HCP (6.5%), and Ventas (6.3%). SPDR Dow Jones REIT ETF (RWR) (issuer web site link) – This fund, launched in April 2001, has $1.3 billion in assets under management. The fund has an expense fee of 0.25%. The fund tracks the Dow Jones U.S. Select REIT Index. The fund holds 82 U.S.-listed equities. The five top holdings are: Simon Property Group (11.4%), Public Storage (5.5%), Equity Residential (5.1%), HCP (4.8%), and Vornado Realty Trust (4.4%). First Trust S&P REIT Index Fund (FRI) (issuer web site link) – This fund, launched in May 2007, has $340 million in assets under management. The fund has an expense fee of 0.50%. The fund tracks the S&P United States REIT Index. The fund holds 116 U.S.-listed equities. The five top holdings are: Simon Property Group (10.4%), Public Storage (5.1%), Equity Residential (4.7%), HCP (4.4%), and Ventas (4.3%). iShares FTSE NAREIT Real Estate 50 Index Fund (FTY) (issuer web site link) – This fund, launched in May 2007, has $40 million in assets under management. The fund has an expense fee of 0.48%. The fund tracks the FTSE NAREIT Real Estate 50 Index. The fund holds 51 U.S.-listed equities. The five top holdings are: Simon Property Group (11.0%), Equity Residential (4.9%), Annaly Capital Management (4.9%), Public Storage (4.8%), and HCP (4.7%). PowerShares Active U.S. Real Estate Fund (PSR) (issuer web site link) – This fund, launched in November 2008, has $16 million in assets under management. The fund has an expense fee of 0.80%. The fund invests in securities of companies that are principally engaged in the U.S. Real Estate industry and included within the FTSE NAREIT All Equity REITs Index. The fund holds 55 U.S.-listed equities. The five top holdings are: Simon Property Group (11.2%), Ventas (5.8%), Equity Residential (5.5%), Vornado Realty Trust (5.5%), and AvalonBay Communities (3.7%). Wilshire U.S. REIT ETF (WREI) (issuer web site link) – This fund, launched in March 2010, has $9 million in assets under management. The fund has an expense fee of 0.32%. The fund tracks the Wilshire US Real Estate Investment Trust Index. The fund holds 95 U.S.-listed equities. The five top holdings are: Simon Property Group (11.0%), Public Storage (5.4%), Equity Residential (4.9%), HCP (4.7%), and Ventas (4.6%). Figure 1: Comparison of four largest broad U.S. REIT ETFs (live web site link)
Our pick for a broad U.S. REIT ETF – The four largest U.S. REIT ETFs each have more than $1 billion in assets under management. These top four REIT ETFs are remarkably similar, holding the largest REITs with similar weights. Figure 1 shows that the price performance of the top REIT ETFs is also very similar, except for the iShares Dow Jones Real Estate Fund (IYR), which underperforms the other three REIT ETFs on both the monthly and weekly charts (to see the weekly chart, simply click on the “live chart link” in the figure title above for the monthly chart and then change the period on the graph to weekly). Of the three broad U.S. REITS with the best performance, our pick is the Vanguard REIT ETF (VNQ) due to the fact that is has the lowest fee by far at only 0.12%. In addition, we like the fact that it holds 106 securities, which is more than its top competitors and gives it more diversification and exposure to smaller REITs than its competitors. The fund also has the largest amount of assets under management at $8.8 billion, which gives it the most liquidity in the group.
U.S. REIT Industry ETFsThere are four REIT ETFs that focus on specific types of REITs. The iShares FTSE NAREIT Mortgage REITs Index Fund (REM) and the iShares FTSE NAREIT Residential Index Fund (REZ) both have sufficient assets to provide some reassurance about their longevity and are acceptable investment vehicles in our view for investors who are looking for that type of exposure. They also have reasonable fees of 0.48% for their size and ETF type. The iShares FTSE NAREIT Mortgage REITs Index Fund (REM) invests in financial institutions that specialize in acquiring and holding commercial and residential mortgages, with a particularly large weight on Annaly Capital Management (20.6%) and American Capital Agency (12.8%). Meanwhile, the iShares FTSE NAREIT Residential Index Fund (REZ) invests in equity REITs that own and manage residential properties. The largest residential REIT held by the iShares’ REZ, for example, is Equity Residential (EQR), which owns and operates more than 400 high-quality apartment properties in the U.S. The other two REITs in this group, the iShares FTSE NAREIT Industrial/Office Index Fund (FNIO) and iShares FTSE NAREIT Retail Index Fund (RTL) have a very low amount of assets under management at this time. Therefore, we would advise investors to stay away from these ETFs due to questions about the longevity of the funds. iShares FTSE NAREIT Mortgage Plus Capped REITs Index Fund (REM) (issuer web site link) – This fund, launched in May 2007, has $220 million in assets under management. The fund has an expense fee of 0.48%. The fund tracks the FTSE NAREIT All Mortgage Capped Index. The fund holds 49 U.S.-listed equities. The five top holdings are: Annaly Capital Management (20.6%), American Capital Agency (12.8%), New York Community Bancorp (6.0%), Chimera Investment (5.7%), and People’s United Financial (4.3%). iShares FTSE NAREIT Residential Index Fund (REZ) (issuer web site link) – This fund, launched in May 2007, has $155 million in assets under management. The fund has an expense fee of 0.48%. The fund tracks the FTSE NAREIT All Residential Capped Index. The fund holds 35 U.S.-listed equities. The five top holdings are: Equity Residential (8.9%), HCP (8.5%), Public Storage (8.3%), Ventas (8.3%), and Avalon Bay Communities (6.4%). iShares FTSE NAREIT Industrial/Office Index Fund (FNIO) (issuer web site link) – This fund, launched in May 2007, has $10 million in assets under management. The fund has an expense fee of 0.48%. The fund tracks the FTSE NAREIT Industrial/Office Capped Index. The fund holds 31 U.S.-listed equities. The five top holdings are: Boston Properties (17.2%), Prologis (15.9%), SL Green Realty (7.0%), Alexandria Real Estate Equity (5.1%), and Duke Realty (4.6%). iShares FTSE NAREIT Retail Index Fund (RTL) (issuer web site link) – This fund, launched in May 2007, has $8 million in assets under management. The fund has an expense fee of 0.48%. The fund tracks the FTSE NAREIT Retail Capped Index. The fund holds 29 U.S.-listed equities. The five top holdings are: Simon Property Group (22.9%), General Growth Properties (7.7%), Macerich (7.6%), Kimco Realty (7.6%), and National Retail Properties (4.8%).
Leveraged Long U.S. Real Estate ETFsThere are two leveraged long U.S. real estate ETFs. Both of these ETFs have sufficient assets under management in our view to be acceptable for investors who are looking for a way to get leveraged exposure to the REIT market. Both have the same expense fee of 0.95%. The choice between the two mainly comes down to whether an investor wants 2X or 3X exposure. ProShares Ultra Real Estate ETF (2X) (URE) (issuer web site link) – This fund, launched in January 2007, has $335 million in assets under management. The fund has an expense fee of 0.95%. The fund tracks twice the daily performance of the Dow Jones U.S. Real Estate Index. Direxion Daily Real Estate Bull 3x Shares (DRN) (issuer web site link) – This fund, launched in July 2009, has $115 million in assets under management. The fund has an expense fee of 0.95%. The fund tracks three times the MSCI U.S. REIT Index.
Short U.S. Real Estate ETFsThere are currently three real estate ETFs that provide short exposure to the U.S. REIT sector. In our view, only the ProShares UltraShort Real Estate ETF (-2X) (SRS) has sufficient funds to be considered by investors for investment purposes. ProShares UltraShort Real Estate (-2X) (SRS) (issuer web site link) – This fund, launched in January 2007, has $170 million in assets under management. The fund has an expense fee of 0.95%. The fund tracks twice the inverse of the daily performance of the Dow Jones U.S. Real Estate Index. ProShares Short Real Estate (-1X) (REK) (issuer web site link) – This fund, launched in March 2010, has $45 million in assets under management. The fund has an expense fee of 0.95%. The fund tracks the inverse of the daily performance of the Dow Jones U.S. Real Estate Index. Direxion Daily Real Estate -3X Bear Shares (DRV) (issuer web site link) – This fund, launched in July 2009, has $35 million in assets under management. The fund has an expense fee of 0.95%. The fund tracks three times the inverse of the price performance of the MSCI US REIT Index.
|
