The housing situation in the U.S. continues to weigh on the minds of homeowners nationwide. Prices continue to fall, and the number of homeowners with underwater mortgages is increasing. With that being said, it is interesting to find that the Real Estate Investment Trusts (REITs) have done well during the bull market rally. (To learn more about REITs, check out How To Analyze Real Estate Investment Trusts.)
TUTORIAL: Exploring Real Estate Investments

Raise the ROOF
Year-to-date the iShares Cohen & Steers Realty Major Index ETF (NYSE:ICF) is up about 5%, versus a mere near 1% loss for the S&P 500. And from the bottom in March, 2009, the ETF has more than tripled in value. Now, there is a new vehicle for investors who want to gain exposure to a portion of the REIT sector - the Index IQ U.S. Real Estate Small-Cap Index ETF (NYSE:ROOF). The ETF is composed of 36 small-cap REITs that most investors lack exposure to, because the typical REIT ETF is highly concentrated on the large-cap stocks.

During the last three calendar years (2008-2010), the small-cap index, which ROOF tracks, has beaten the large-cap index. The ETF charges an expense ratio of 0.69%, and the index that it tracks pays an annual divided yield of 5% (To learn more on how to value a REIT, see How To Assess A Real Estate Investment Trust (REIT).)

Top Holdings
Mortgage REITs make up 20% of the allocation, with retail REITs at 18%, office REITs at 17% and hotel REITs also at 17%. The diversification among a variety of small-cap REITs is a bonus for ROOF because it is not overly dependent on one niche area.

The top stock holding is Invesco Mortgage Capital (NYSE:IVR), a mortgage REIT that acquires, finances and manages mortgage-backed securities and loans. The REIT currently pays an annual dividend of 17.6%, and trades with a forward P/E ratio of 5.2. In the last 12 months, IVR is up approximately 1% - however, that does not include the $3.88 in dividends a holder of the stock would have received.

Office REIT Lexington Realty Trust (NYSE:LXP), the number-three holding in the ETF, currently pays a 5.2% dividend. The company concentrates on single-tenant commercial properties across the U.S. that are generally leased to major corporations. The stock has recently pulled back to its 200-day moving average at $8.50, and is once again looking attractive. The stock trades with a forward P/E ratio of 9.78.

Redwood Trust (NYSE:RWT) is considered a diversified REIT, but the majority of its business is related to investing in residential and commercial real estate loans and securities. The stock currently pays a 6.6% dividend, and trades at a forward P/E ratio of 12.19. Technically, the stock has struggled, but it has strong support at the $14 area.

The Bottom Line
The small-cap portion of the REIT sector has a three-year winning streak against its larger counterparts. Other than that, ROOF also provides an above-average dividend yield and (even more importantly), exposure to a niche sector that most investors ignore. Adding ROOF to a portfolio will further diversify a well-managed portfolio. (For more examples of other REITs and how to use them, check out 5 Types Of REITs And How To Invest In Them.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Mutual Funds & ETFs

    Buying Vanguard Mutual Funds Vs. ETFs

    Learn about the differences between Vanguard's mutual fund and ETF products, and discover which may be more appropriate for investors.
  4. Mutual Funds & ETFs

    ETFs Vs. Mutual Funds: Choosing For Your Retirement

    Learn about the difference between using mutual funds versus ETFs for retirement, including which investment strategies and goals are best served by each.
  5. Mutual Funds & ETFs

    The 8 Most Popular Vanguard Funds for a 401(k)

    Learn about some of the mutual funds in Vanguard's lineup that are popular among 401(k) investors, and find out why you should consider them.
  6. Mutual Funds & ETFs

    How to Reinvest Dividends from ETFs

    Learn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
  7. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  8. Home & Auto

    5 Mistakes That Make House Flipping A Flop

    If you're just looking to get rich quick, you could end up in the poorhouse.
  9. Entrepreneurship

    Top 10 Features Of a Profitable Rental Property

    Find out which factors you should weigh when searching for income-producing real estate.
  10. Mutual Funds & ETFs

    Best 3 Vanguard Mutual Funds for Retirement

    Discover the top Vanguard target-date retirement funds with target dates in 2020, 2030 and 2050, and learn about the characteristics of these funds.
  1. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  2. How liquid are Vanguard mutual funds?

    The Vanguard mutual fund family is one of the largest and most well-recognized fund family in the financial industry. Its ... Read Full Answer >>
  3. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  4. How do mutual funds work in India?

    Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
  5. Are UTMA accounts escheatable?

    Like most financial assets held by institutions such as banks and investment firms, UTMA accounts can be escheated by state ... Read Full Answer >>
  6. What are the dormancy and escheatment rules for stock accounts?

    While the specific dormancy and escheatment rules for stock accounts vary by state, all states provide for the escheatment ... Read Full Answer >>

You May Also Like

Trading Center