Real Estate Investment Trusts, or REITs, are designed to pool capital to buy and operate income-producing real estate. Because of the nature of the structure, REITs are required to distribute at least 90% of their income to shareholders. REITs tend to focus on specific types of income-producing properties or geographical locations. The vast number of REITs available makes the selection, analysis and purchase of shares in the right program difficult. ETFs offer the average investor exposure to this asset class without having to analyze each potential investment.
REITs offer returns to investors in two ways: the combined pricing of the shares, and the dividend return. Investors should keep in mind that the appraised values of the real estate holdings do not influence the day-to-day price of the shares. However, looking at the underlying real estate value and comparing it to the share price might give some indication of purchasing REITs (or REIT ETFs) at a discount.
One ETF that brings a packaged program to market is the Vanguard REIT ETF (NYSE:VNQ). VNQ, established Oct. 1, 2004, has a current dividend yield is 3.41%, based on a share price of $50.87. The returns as of Aug. 31, 2011, are listed below.
- 1 month: -5.62%
- 3 months: -7.33%
- YTD: 5.65%
- 1 year: 18.59%
- 3 years: 2.84%
- 5 years: 0.61%
VNQ makes ongoing portfolio changes, so quarter-over-quarter holdings might result in significant rebalancing. The exact composition and weightings are subject to reporting bias by VNQ and the tracking services that collect this data. The top 10 holdings as of Aug. 31, 2011, are Simon Property Group (NYSE:SPG), Equity Residential (NYSE:EQR), Public Storage (NYSE:PSA), Boston Properties (NYSE:BXP), H! CP (NYSE:HCP), Ventas (NYSE:VTR), Vornado Realty Trust (NYSE:VOR), Avalon Bay Communities (NYSE:AVB), ProLogis (NYSE:PLD) and Health Care REIT (NYSE:HCN). The total weighting is 46.7%.
Another participant in the REIT marketplace is Cohen & Steers, which manages several real estate mutual funds and a few ETFs. One of the ETFs is the Cohen & Steers Global Realty Majors ETF (NYSE:GRI). GRI was established on May 7, 2008, and seeks opportunities in Europe, Asia, North America, and Latin America.?It has delivered the following returns:
- 1 month: -5.84%
- 3 months: -7.57%
- YTD: 1.03%
- 1 year: 15.56%
- Since inception: -18.11%
These returns are based on market price behavior only. The dividend rate of 6.25%, based on a share price of $30.44 as of Sept. 30, 2011, offers some downside protection against price declines.
The top 10 holdings and weightings inclue Simon Property (4.44%), Mitsubishi Estate (4.33%), Sun Hung Kai Properties (3.61%), Unibail-Rodamco (3.56%), Westfield Group (NYSE:WDC, 3.46%), Public Storage (3.36%), Equity Residential (3.3%), HCP Inc. (3.07%), Ventas (3.06%), Vornado Realty Trust (2.97%).?GRI’s?holdings and country concentrations are subject to change.
Another ETF that focuses on REITs is the State Street Global Advisors SPDR Dow Jones Wilshire REIT ETF (NYSE:RWR). RWR was established on April 23, 2001, and thus has a lengthy track record in this space. RWR currently offers a 3.01% dividend yield. The returns history, as of Aug. 31, 2011, is listed below:
- 1 month: -5.48%
- 3 months: ?-3.76%
- YTD: 6.76%
- 1 year: 19.79%
- 3 years: 1.65%
- 10 years: 9.9%
- Since inception: 10.82%
The top 10 holdings and weighting of RWR, as of Sept. 29, 2011, are Simon Property (10.96%), Public Storage (5.33%), Equity Residential (5.25%), HCP Inc. (4.86%), Vornado Realty Trust (4.76%), Boston Properties (4.49%), Ventas (4.37%), ProLogis (3.88%), Avalon Bay Communities (3.7%) and Health Care REIT (2.86%).
RWR holds 81 REITs, but the top 10 represent 50.46% of the portfolio.
Jeffrey L. Stouffer is the principal of Mercantile Capital Group, a Herndon, Va.-based introducing broker registered with the CFTC and a member of the National Futures Association. He can be reached at mercapitalgroup@aol.com. As of this writing, he did not own a position in any of the aforementioned stocks.
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