For retail investors, the exchange traded fund boom has opened up a plethora of opportunities for portfolio construction. From simple indexing approaches to more complex strategies, ETFs are quickly becoming the go-to investment vehicle. Nowhere is that more prevalent than the world of real estate. Overall, the continued evolution of the ETF industry has allowed investors to gain cheap and easy access to the commercial and residential real estate markets within one single ticker .
What’s the Appeal?
For many investors, real estate has become an integral part of a well-diversified portfolio and offers several distinct advantages.
First, real estate can provide stable and high income. Created in the 1960s as a way to allow regular retail investors to participate in the commercial real estate market, real estate investment trusts (REITs) are traded on the major exchanges like stocks and invest in real estate directly – either through physical properties or through mortgage investment. In exchange for offering investors high-dividend distributions, REITs receive special tax considerations .
Secondly, real estate offers the potential to hedge against rising inflation as rents are generally designed to keep pace with increasing prices. Not to mention that owning physical property and goods can be quite beneficial in periods of high sustained inflation. Finally, as a non-correlated asset class, real estate adds a level of diversification to a portfolio and can actually “smooth-out” returns over long stretches of time.
All of these benefits on their own are worth adding real estate and REITs to a portfolio; however, combining them with the low cost, intraday tradability, diversification advantages of ETFs, and investors have perhaps the perfect way to gain exposure to the asset class –which bets on some of the largest REITs in the U.S.–currently only yields 2.15%, while the mortgage REIT tracking iShares FTSE NAREIT Mortgage Capped Index yields a staggering 12.68%. Some, like SPDR S&P Homebuilders , which is more of a play on housing construction rather than the ownership of physical buildings, yields barely anything at all. For those looking for dividends, the following are good places to start:
|ETF||Name||Annual Dividend Yield|
|REM||iShares FTSE NAREIT Mortgage Capped Index||12.68%|
|MORT||Market Vectors Mortgage REIT ETF||8.23%|
|ROOF||IQ U.S. Real Estate Small Cap ETF||4.68%|
|VNQ||Vanguard REIT Index ETF||3.36%|
|RWR||SPDR Dow Jones REIT||2.83%|
|REZ||iShares FTSE NAREIT Residential||2.97%|
|RTL||iShares FTSE NAREIT Retail||2.92%|
Currently, the United States only represents about 30% of the global real estate market. Given that small amount, real estate investors may want to break out their passports. Since the mid-’90s, nearly 30 countries–from Singapore to France–have adopted the REIT tax structure. This has opened up these various markets to global investors and has helped the sector’s market capitalization has expand several fold. According to indexer FTSE, there are now over 280 international REITs creating an $825 billion global marketplace.
Aside from tapping these various markets for diversification benefits, investors may also want to expand their REIT focus to include international firms for another reason – a weakening U.S. dollar. According to industry group NAREIT, from 1990 to 2009–when the U.S. dollar was falling against the Japanese yen–average total returns for investors were 12.1% per year for investments in Asian REITs. However, 10.4% of that return was from currency gains and just 1.7% was from the REITs themselves. The industry group found similar results for Europe .
Those added currency gains have helped funds like the SPDR Dow Jones International Real Estate and the iShares FTSE EPRA/NAREIT Developed REIT ex-US provide great returns as well as bigger yields than their domestic counterparts. Currently, both RWX and IFGL yield 6.2% and 5.51%, respectively.
The Bottom Line
For investors, the appeal of adding real estate to a portfolio is simple: the asset class can provide stable, high and inflation-fighting income, all while providing diversification and correlation benefits. All of these advantages are only enhanced when placed in the exchange traded funds. While the sector has experienced a few hiccups in the recent past, real estate deserves a place in modern portfolios.
Disclosure: No positions at time of writing.
InvestingWhile stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
Chart AdvisorThere has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
EconomicsWe share some insights on how the recent terrorist attacks in Paris could impact the economy and markets going forward.
Chart AdvisorCopper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
Mutual Funds & ETFsLearn about the differences between Vanguard's mutual fund and ETF products, and discover which may be more appropriate for investors.
Mutual Funds & ETFsLearn about the difference between using mutual funds versus ETFs for retirement, including which investment strategies and goals are best served by each.
Mutual Funds & ETFsLearn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
Mutual Funds & ETFsDiscover the three Vanguard funds tracking the S&P 500 Index, and learn about the characteristics and historical statistics of these funds.
Forex FundamentalsDiscover the different options that are available to investors who want to obtain exposure to the Chinese yuan, including ETFs and ETNs.
Mutual Funds & ETFsLow expense ratios are a big selling point for ETFs, but are they being focused on too much?
Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>