This article was written by Brian Spero, who covers investing, real estate, and technology on the financial blog, Money Crashers Personal Finance.
Even though your house may still have a "For Sale" sign in the yard, recent U.S. housing market numbers reflect a positive long-term outlook and renewed interest from buyers. Fueled by rock-bottom interest rates for mortgages and positive economic growth factors like unemployment and GDP, real estate prices have risen 4% to 5% over the last 12 months.
That trend is likely to continue in the near term-- especially if housing data remains solid-- and many investors are looking for ways to capitalize on the resurgence. For some, exchange traded funds (ETFs) could be the answer, offering an opportunity to buy into the boom with a single product that's relatively affordable and straightforward.
If you're convinced that the real estate market is finally on solid ground, here's a short list of intriguing ETFs covering real estate investment trusts (REITs) that highlight the potential and diversity of the category:
A logical place to start when considering the introduction of broad real estate holdings to your investment portfolio, the Vanguard REIT Index ETF has been touted for its solid approach to mirroring the returns of the MSCI US REIT Index. It currently holds a bucket of 108 stocks, representing a wide-spectrum of domestic companies with purchases in office buildings, hotels, and other real estate.
Established in 2004, the fund has substantial net assets in excess of $32 billion, and an ultra-competitive expense ratio of 0.10%. Up 9% since its inception, this leading real estate fund has provided a one-year performance on the plus side of 17%.
With essentially all of its asset allocation in U.S. stocks focused on the real estate sector, this ETF could be poised to supply a rewarding return against the inherent risks of real estate market fluctuation.
iShares FTSE NAREIT Mortgage Plus Capped Index Fund (REM)
For investors sold on the current stability of mortgages due to continuing low-interest rates, the NAREIT Mortgage Plus Capped Index Fund is worth a look. This fund invests net assets in excess of $1 billion in the residential and commercial mortgage real estate sector, seeking results that closely match those supplied by the FTSE NAREIT All Mortgage Capped Index.
Since its inception in May of 2007, the fund has recovered most of the losses it sustained over the first 12 months and is now down just -8.73% since inception (after a brutal -43.20% in total returns over the first 12 months of its life at the depths of the crash). In 2012, the fund kept pace with the index at +21.90%, and is +12.51% year-to-date.
The ETF currently spreads its assets over 29 holdings, and is top-heavy with more than 70% focused on the top 10 securities. It relies heavily on its top two holdings with 21.27% of net assets invested in Annaly Capital Management (NLY) and 15.70% in American Capital Agency Corp (AGNC). The fund follows a high-yield strategy (current SEC-30 Day yield is north of 11%) in the moderately risky mortgage finance space, and may be enticing to investors thanks to the positive climate of the mREIT market.
A relatively young fund offered by Schwab that boasts low annual fees of 0.13%, this U.S. real estate ETF seeks to provide potential returns from both dividend income and capital appreciation. Set to track the Dow Jones U.S. Select REIT Index as closely as possible, the fund efficiently conforms to the index while providing optimal tax efficiency.
The product currently includes total net assets of $466.6 million, with allocations across 83 stocks. Just below 50% of its assets are concentrated in its top 10 holdings. With a low 5% annual turnover, this ETF's index demonstrates a steadier hand than most other competing funds.
The ETF's diverse real estate holdings have produced a +14.56% return since its inception at the start of 2011, with a current above-benchmark cumulative performance of +5.40% year-to-date. With an impressive short sample of success in mirroring its underlying index, a fund like the Schwab U.S. REIT ETF may provide a portfolio with the desired exposure to the broader market with healthy dividend opportunities.
For those who put more faith in the commercial real estate market than sustained residential growth, or wish to diversify within the category, the SPDR DJ Wilshire REIT ETF is a solid option. This fund strives to follow the Wilshire REIT Index of companies operating in commercial real estate properties.
Made up of 84 securities, this fund's primary holdings are regional malls, apartments, healthcare, and office space. Launched in April 2001, the fund allocates almost half of its $2 billion in net assets to its top 10 holdings. It has posted an impressive +11.41% performance since inception, weathering the 2007 housing collapse by rebounding with a +19.44% performance over the past three years.
The fund is managed using a float-adjusted market capitalization technique, has a gross expense ratio of 0.25%, and a steady annual turnover rate of 7%.
Final Thoughts
While many Americans with homes on the market may benefit from the recent real estate upswing, ETFs provide a path for a wide range of investors to profit. Whether you're considering an ETF that mirrors the broadest index or one that's more focused, now could be a good time to talk to your financial advisor about adding a real estate ETF to your portfolio.
What is your experience with real estate-oriented ETFs?
