Zacks Investment Ideas feature highlights: Vanguard REIT ETF, iShares Dow
Jones U.S. Real Estate Index Fund and SPDR Dow Jones REIT ETF
CHICAGO, April 24, 2013
CHICAGO, April 24, 2013 /PRNewswire/ --Today, Zacks Investment Ideas feature
highlights Features: Vanguard REIT ETF (AMEX:VNQ), iShares Dow Jones U.S. Real
Estate Index Fund (AMEX:IYR)andSPDR Dow Jones REIT ETF (AMEX:RWR).
3 Excellent REIT ETFs You Should Not Ignore
As investors continue to search for yield in the current environment of ultra
low rates, REITs are becoming increasingly popular due to their solid dividend
payouts. In addition to attractive income, REITs have rewarded investors with
excellent capital appreciation over longer term. Further, they add
diversification benefits to the portfolio and also act as an inflation hedge.
What are REITs?
REITs own and operate income-producing real estate. They are required to
distribute at least 90% of their taxable income to shareholders annually in
the form of dividends and in turn, they can deduct those dividends paid from
their corporate taxable income.
The Outlook Remains Strong
With gradually improving economy and low interest rates (at least through
2014), the outlook for REITs remains strong. (Read: 4 Excellent Dividend ETFs
for Income and Stability)
Residential real estate market has most likely bottomed out and commercials
real estate prices are also now significantly up from their year ago levels.
Further, with increasing rents and improving occupancy, the industry
fundamentals are expected to remain strong.
REITs in general are now much less leveraged compared to historical levels and
many have refinanced their debt at much lower interest rates. Also, many REITs
were able to acquire premium properties at attractive prices during the
Beware of Mortgage REITs' Risks
Unlike equity REITs, mortgage REITs do not hold properties, but they invest
mainly in mortgage backed securities (MBS) issued by Fannie Mae and Freddie
Mac. They use short-term debt for financing their purchases and are usually
Mortgage REITs have done very well of late as investors have been pouring in
money, due to their double digit yield yields.
They have benefitted from low short term rates but increasing purchases of
MBSs by the Fed under QE3 is now driving the yields lower, putting pressure on
Mortgage REITs' profitability. Further, due to their high leverage, they are
exposed to greater risk once interest rates start going up. (Read: Best ETF
Strategies for 2013)
Looking at the Performance
After their plunge in 2008, REITs recovered nicely and have been outperforming
the broader market for the last four years. While volatility has been high if
we look at five years' history (mainly due to massive plunge in 2008), it has
been in-line with the broader market if we look at one year's performance.
Based on one year price performance
SPY VNQ IYR RWR
Annualized St. Dev* 12.82% 12.52% 11.95% 12.63%
Annualized Return* 13.02% 13.99% 14.79% 12.33%
Based on five years price performance
SPY VNQ IYR RWR
Annualized St. Dev** 18.96% 32.62% 31.24% 33.05%
Annualized Return** 6.56% 11.42% 9.89% 10.02%
*Using daily price returns
**Using monthly price returns
Vanguard REIT ETF (AMEX:VNQ)
VNQ tracks the MSCI US REIT Index that covers about two-thirds of the value of
the entire U.S. REIT market. Launched in September 2004, this fund has
attracted about $19.1 billion in assets so far, making it the largest product
in this space.
The fund has highest allocation to Specialized REITs (30.8%) followed by
Retail REITs (26.7%) and Residential REITs (16.2%).
The fund is one of the low cost choices in the space, charging only 10 bps in
annual fees from investors Further, it is quite is liquid as it trades in high
volumes of 2.6 million shares per day on an average. It currently yields a
solid 3.3% in annual dividends.
iShares Dow Jones U.S. Real Estate Index Fund (AMEX:IYR))
IYR seeks to replicate the Dow Jones U.S. Real Estate Index, before fees and
expenses, and holds 89 securities in the basket.
Launched in June 2000, the fund has so far garnered $5.9 billion in assets. It
chares 47 bps in annual fees and pays out an attractive 12-month dividend
yield of 3.41%. The fund is extremely liquid with an average daily trading
volume of about 5.4 million shares.
Like VNQ, SPG occupies the top position in the basket with 8.3% allocation,
while American Tower and HCP rounded out the top three.
Among sector holdings, Specialty REITs (29.8%), Retail REITs (20.3%) and
Industrial REITs (18.1%) occupy the top three spots.
SPDR Dow Jones REIT ETF (AMEX:RWR)
RWR tracks the Dow Jones U.S. Select REIT Index which follows companies that
operate commercial real estate properties across the country.
The fund which made its debut in April 2001 has amassed over $2.3 billion in
assets so far. It charges investors 25 basis points annually for operating
Like VNQ, SPG, PSA and HCP occupy the top three positions in the fund's basket
of assets. Looking at the sector exposure, Regional Malls take the top spot in
the basket with 18.4% share while Apartments (17.6%) and Healthcare (15.2%)
round out the top three.
The fund pays out about 2.7% in annual dividend yield while trading volume is
about 18 thousand shares on a daily basis.
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