Reit ETF

iShares has several REIT ETFs to choose from including two popular U.S. Real Estate funds:

First, the Dow Jones U.S. Real Estate Index Fund (IYR) which seeks to track the Dow Jones U.S. Real Estate Index before fees and expenses. Like the other two major REIT ETFs the top 3 holdings are: Simon Property Group (SPG), Vornado Realty Trust (VNO) and Public Storage (PSA) however this fund has less concentration with the top 10 holdings making up only about 40% of total assets.

Here is a chart of how IYR (brown line) has performed in comparison to the largest Reit ETF – VNQ (black bars). As you can see VNQ has slightly outperformed recently but is about the same over the entire time frame. The big difference is the hefty annual expense ratio for IYR at 46 basis points versus 13 for VNQ.

The Second fund is the iShares Cohen & Steers Realty Majors Index Fund (ICF) which seeks to track U.S. Real Estate as measured by the Cohen & Steers Realty Majors Index before fees and expenses. The top holdings for this fund are also very similar to the others but the concentration is much higher with 60% of the assets in the top 10 holdings and only 31 total holdings compared to the 71 in IYR.

As you can see by the chart below comparing ICF to VNQ that this portfolio concentration has lead to slight out performance at times but overall is basically inline with VNQ. Fees for ICF are lower than IYR at 35 basis points but still much higher than the 13 charged by Vanguard for VNQ.

Established April 23, 2001 the SPDR REIT ETF (RWR) is several years older but much smaller than Vanguard’s REIT ETF (VNQ) with only about a billion and a half in assets. This fund carries a 25 basis point annual expense ratio which is quite reasonable but almost double VNQ. This ETF was designed to track the returns and characteristics of the Dow Jones U.S. Select REIT Index before fees and expenses.

The top 3 holdings of this ETF are Simon Property Group (SPG), Vornado Realty Trust (VNO) and Public Storage (PSA). The top 10 holdings make up approximately 52% of the total assets.

As with all REIT ETFs RWR has performed well in the past two years after a devastating crash in 2008 and early 2009. The following chart shows the comparison between RWR and VNQ since the inception of VNQ. As you can see the performance of the two ETFs is almost identical over that time frame with RWR gaining a slight advantage at the peak in 2007.

The Vanguard REIT Index ETF (VNQ) is the largest REIT ETF available. It is a passively managed index fund that is designed to track the performance of the MSCI® US REIT Index. The MSCI US REIT Index broadly and fairly represents the equity REIT opportunity set with proper investability screens to ensure that the index is investable and replicable. The index represents approximately 85% of the US REIT universe. So this is a very broad based US specific REIT ETF.

Established on Sep 23, 2004, VNQ is not only one of the largest REIT ETFs but also has the lowest annual expense ratio at .13% (13 Basis Points) in the Vanguard tradition.

As of 11/30/2010 the holdings of the fund were composed of:

Retail REITs – 27.10%
Specialized REITs – 26.40%
Residential REITs - 16.80%
Office REITs - 16.20%
Diversified REITs - 7.80%
Industrial REITs - 5.60%

As you can see by the chart below VNQ outperformed the S&P 500 prior to the financial crisis, underperformed during the crisis and through 2009 and almost was back in line with S&P performance by the end of 2010.

This chart is from the inception date through 1/11/2011

In the current low interest rate environment REITs have been very actively purchased by those who are looking for better returns on their money.   The relatively high yield of REITs combined with the low asset prices caused by the credit crunch and recession made the REIT asset class very attractive.  In fact, it was one of the best performing sectors in the past year.

Investors who want to establish a position that is diversified among several REITs will find it easier to purchase a quality REIT ETF.   Our goal is to help you find the information you need to make some good decisions.