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David Fry, ETF Digest (67 clicks)
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Dave Fry, Publisher ETF Digest

The ETF real estate sector is primarily dominated by Real Estate Investment Trusts (REITs). In turn, most REITs are focused on commercial real estate sectors including office, shopping malls, hospitality, and to a lesser extent, residential real estate via multi-family housing. Though beyond multi-family housing, it would be misleading to believe the sector has any primary focus on residential issues. At the end of the day, large private venture capital firms control most of the multi-family housing niche.

The real estate sector has about 17 domestic ETFs devoted to the space and continues to be popular with investors believing the sector adds a level of diversification to their investment portfolio. However, given Quantitative Easing, or QE, the reality is the real estate sector has provided very little diversification, given that REIT-based ETFs are trending in the same direction as most equity sectors.

Additionally, Zero Interest Rate Policies, or ZIRP, has also fueled the popularity of the real estate sector. Investors believe that ZIRP adds incentive for investors seeking greater yields available through REITs. However, given REITs' unique structure, some of this higher yield earned by investors is regarded as a return of principal varying by each ETF and could have negative tax consequences.

Retail investors and financial advisors have become yield-driven in their hunt for assets in the income-oriented category over capital gains, which correlates directly, in my opinion, with the aging demographic in the U.S. and other developed countries. However, investors and advisors should remain cautious, because while REITs offer better yields superficially, on close inspection, these yields are not much greater than other dividend focused sectors.

Aside from popularity, other issues to be aware of that could negatively impact the space is the belief that shopping malls are disappearing and will continue to do so in the coming years due to the explosive growth in ecommerce. Further, based on a string of recent weak economic data reports, global economic growth continues to dissipate and would therefore, in theory, also negatively impact any glimmer of growth for malls and office complexes.

The multi-family housing sector on the other hand indicate some positive aspects due to the current trend of preferring to rent than purchase a home. This is the result of homebuyers having the general inability to easily obtain mortgages.

At the end of the day, it's not really fair to rank the ETFs listed below since there are choices between price or market-cap weightings, enhanced or conventional indexes, as well as those targeting particular sub-sectors. They're all quite good as far as ETF construction and are thus subject to individual choice and objective.

In my latest ebook, "The Best ETFs: US Equities" I handpick the best ETFs even further in the US Equities space in 26 subcategories, ranging from different market capitalizations and approaches, to sector and subsector-specific ETFs, to dividend and high yield dividend ETFs. This ebook is just the first in a series that aims to help you construct a comprehensive, well-balanced portfolio of ETFs from across the wide spectrum of markets and asset classes available. The next books in the series will focus on overseas ETFs, fixed income ETFs, alternative ETFs, and portfolio construction.

The ETFs below feature a technical view of conditions from monthly chart views. If interested in seeing current charts for these ETFs, you need look no further than by reading my blog, Dave's Daily. I post many of ETFs on a daily basis using daily and/or weekly charts and if looking for monthly charts, most of these are also featured within my new ebook as mentioned above.

When viewing my charts, my simple recommendation for longer-term investors is that they stay "above" or on the "right-side" of the 12-month simple moving average (MA). When prices are above the MA, stay long, and when below, remain in cash or short. Investors more interested in a fundamental approach may not care so much about technical issues, instead preferring to buy when prices are perceived as low and sell when high, among other reasons.

At ETF Digest, this purely fundamental strategy is not our only approach. Subscribers to the ETF Digest newsletter receive added trading alerts for many of these ETFs when markets become extended. Our proprietary trading system features ETFs with weekly and daily charts, and provide investors signals as to when to exit and/or hedge open positions, or when conditions become overbought or oversold.

FTSE NAREIT Mortgage REIT ETF (REM)

REM follows the FTSE NAREIT All Mortgage Capped Index which consists of the residential and commercial real estate, mortgage finance and savings associations in the U.S. equity market. The fund was launched in May 2007. The expense ratio is 0.48%. AUM equal $1.2 billion and average daily trading volume is approaching 1 million shares. As of May 2013, the YTD return was 11.19%. The 1-YR return was 18.18%. As of December 2012 the annual dividend yield was 8.40%.

NOTE: Dividend yields include return of principal and yields are dependent on each investor's income tax situation.

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iShares FTSE NAREIT Residential ETF (REZ)

REZ follows the FTSE NAREIT All Residential Capped Index which measure the residential real estate, healthcare and self storage sectors of the U.S. market. The fund was launched in May 2007. The expense ratio is 0.48%. AUM equal $356M and average daily trading volume is around 50K shares. As of May 2013, the annual dividend yield was 2.03% with YTD return 12.63%. The 1-YR return was 17.10%.

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iShares NAREIT Real Estate 50 ETF (FTY)

FTY follows the FTSE NAREIT Real Estate 50 Index which measures the performance of the large cap real estate sector of the U.S. equity market. The fund was launched in May 2007. The expense ratio is 0.48%. AUM equal $103M and average daily trading volume is 13K shares. As of May 2013, the annual dividend yield was 2.34% with YTD return 12.73%. The 1-YR return was 16.73%.

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PowerShares Active U.S. Real Estate ETF (PSR)

PSR actively manages the constituents found in the FTSE NAREIT All Equity REIT index. The selection methodology uses quantitative and statistical metrics to indentify attractively priced securities and manage risk. The fund was launched in November 2008. The expense ratio is 0.80%. AUM equal $33 million and average daily trading volume is around less than 5K shares. The YTD return 14.53%. The 1-YR return was 16.66%. As of Dec 2012, the annual dividend yield was 1.28%.

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Vanguard REIT ETF (VNQ)

VNQ follows the MSCI US REIT Index which covers about 2/3 of all REITs in the U.S. market. The fund was launched in September 2004. The expense ratio is 0.10%. AUM equal $20,036.8M with average daily trading volume 2.6M shares. As of December 2012, the annual dividend yield was 2.45% with YTD return 14.70%. The 1-YR return was 17.88%. VNQ trades commission free at TD Ameritrade and Vanguard.

iShares DJ U.S. Real Estate ETF (IYR)

IYR follows the Dow Jones U.S. Real Estate Index which measures the real estate industry primarily through REITs. The fund was launched in June 2000. The expense ratio is 0.47%. AUM equal nearly $6 billion and average daily trading volume is 8.5M shares. As of May 2013, the annual dividend yield was 2.54% with YTD return 13.79%. The 1-YR return was 19.00%. IYR trades commission free at Fidelity.

For IYR and VNQ inverse and leveraged ETFs are available from Direxion Shares and ProShares which are linked to highly-correlated indexes.

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iShares Cohen & Steers Major Real Estate ETF (ICF)

ICF follows the Cohen & Steers Realty Majors Index which consists of selected REITs. The fund was launched in January 2001. The expense ratio is 0.35%. AUM equal $3,290M and average daily trading volume is 330K shares. As of May 2013, the annual dividend yield was 2.01% with YTD return 13.13%. The 1-YR return was 15.81%.

SPDR DJ Wilshire REIT ETF (RWR)

RWR follows the Dow Jones U.S. Select REIT Index consists primarily of REITs in commercial real estate. The fund was launched in April 2001. The expense ratio is 0.25%. AUM equal $2.3 billion and average daily trading volume is 190K shares. As of May 2013, the annual dividend yield was 2.16% with YTD return 13.19%. The 1-YR return was 15.95%. RWR trades commission free at TD Ameritrade.

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First Trust REIT ETF (FRI)

FRI follows the S&P United States REIT Index measures the investable U.S. REIT market. The fund was launched in May 2007. The expense ratio is 0.50%. AUM is just over $500M and average daily trading volume is around 103K shares. As of May 2013, the annual dividend yield was 2.00% with YTD return 15.17%. The 1-YR return was 18%.

Schwab U.S. REIT ETF (SCHH)

SCHH follows the Dow Jones U.S. Select REIT Index. The fund is quite new being launched in January 2011. The expense ratio is 0.07%. It should be noted that uniquely the ETF allows investors to trade this commission free for Schwab customers. AUM equal $600M and average daily trading volume is 145K shares. As of May 2013, the annual dividend yield was 1.66% with YTD return 14.59%. The 1-YR return was 17%. SCHH trades commission free at Charles Schwab.

SUMMARY

REITs have gained popularity from investors seeking income. Some residential oriented REITs have done extremely well. Remember many REIT structures allow for return of principal which may have negative tax consequences to unaware investors.

It's also important to remember that ETF sponsors have their own competitive business interests when issuing products which may not necessarily align with your investment needs. New ETFs from highly regarded and substantial new providers are also being issued.

It goes without saying that trends within the group are quite similar and issues vary primarily in fee structure and focus.

The ETF Digest is long SCHH in a Lazy Portfolio and IYR in a trading sector.

(Source for data is from ETF sponsors and various ETF data providers)

Source: Top 10 U.S. Real Estate Sector ETFs