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. Fundamental Analysis

    Calculating Return on Net Assets

    Return on net assets measures a company’s financial performance.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  6. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
  7. Mutual Funds & ETFs

    ETF Analysis: ETFS Physical Platinum

    Learn about the physical platinum ETF. Platinum embarked on a bull market from 2001 to 2011, climbing to record prices along with other precious metals.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Turkey

    Learn about the iShares MSCI Turkey exchange-traded fund, which invests in a wide variety of companies' equities traded on Turkish exchanges.
  9. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  10. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Derivative

    A security with a price that is dependent upon or derived from ...
  3. Real Estate Investment Trust - ...

    A REIT is a type of security that invests in real estate through ...
  4. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  5. Ginnie Mae Pass Through

    A type of investment issued by the Government National Mortgage ...
  6. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
RELATED FAQS
  1. Where do penny stocks trade?

    Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
  2. Where can I buy penny stocks?

    Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  6. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!