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Tickers in this Article: REZ, RTL, AIV, AVB, EQR, ICF, VNO, VNQ, RWR
When your portfolio is loaded with stocks and not much else, many experts will tell you that real estate is one of the best ways to diversify. The problem with that strategy right now is that the housing sector is in a bit of a crisis.

It's certainly not an ideal time to be looking at real estate, but I believe the use of Real Estate Investment Trusts is still a valid diversification strategy especially for investors who have a three-year or greater time horizon. This article will examine several REIT ETFs; two of them are short-term winners with a limited history; the other three are long-term winners that have, not surprisingly, seen dismal short term returns. These ETFs may be the answer to finding some value in a sector in crisis. (To learn more about ETFs, and how they work, read An Inside Look At ETF Construction.)

Short Term Winners
The best year to date performers in my ETF screen are:

  • iShares FTSE NAREIT Residential (AMEX:REZ)
    The iShares Residential ETF has returned 11% year to date. The ETF focuses on REITs that invest in apartment buildings and multifamily communities. Its top three holdings including Apartment Investment & Management (NYSE:AIV), Avalonbay Communities (NYSE:AVB) and Equity Residential (NYSE:EQR). Each of these REITs pays a dividend of at least 4%. The rental market has naturally received a boost since the credit necessary to purchase a home has become increasingly difficult to attain.

  • iShares FTSE EPRA/NAREIT Europe (AMEX:RTL)
    The iShares Europe ETF has returned 7% year to date. It focuses on REITs that invest in shopping malls in the U.S. and abroad. Its top three holdings including Simon Property Group (NYSE:SPG), General Growth Properties (NYSE:GGP) and Kimco Realty Corporation (NYSE:KIM).
Each of these REITs also yields at least 4%. Record gas prices have sent consumer confidence reeling and retail sales followed suit. The good news for retail REITs is that tenants are still required to pay rents on their locations regardless of market conditions.

Long Term Winners
Long term investors may understandably feel more comfortable with ETFs that have at least a three-year history. The following three ETFs all have returns above 11% for that time period although they have fallen sharply during the past year.

  • iShares Cohen & Steers Realty Majors (AMEX:ICF)
    ICF has returned nearly 13% to investors over the past three years. This ETF takes a more diversified approach by having a retail play, SPG; an office space play, Vorando Realty Trust (NYSE:VNO); and an industrial distribution play, Prologis Trust, as its top three holdings.

  • Vanguard REIT Index ETF (AMEX:VNQ) and DJ Wilshire REIT ETF (AMEX:RWR)
    These two ETFs have the same top three holdings, and both have returned more than 11% over the same three-year period. VNQ has the highest yield at 5.23% among the three REITs with at least three-year histories. VNQ also has the highest turnover ratio at 36% of its portfolio annually.
The contrarian mindset goes against the masses and looks for value where other may see chaos. Looking at the real estate sector for value is doing just that. However, investors considering adding real estate to their portfolio must search beyond the fleeting promise of short term gains and choose investments with a long term goal of diversification in mind, such as ETFs.

To see if REITs are the investment for you, read The REIT Way.

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