The Appeal of REIT ETFs

by: Gary Gordon

Real Estate Investment Trusts, or REITs, used to offer attractive yields and a measure of stability. These days, a REIT is one of the more volatile investment choices. What’s more, even the attractiveness of the income stream is questionable… when one considers alternative income producers (e.g., convertibles, preferreds, energy trusts, etc.).

Nevertheless, in December, most REIT ETFs were chart-toppers. And that’s in spite of the dismal new home sales numbers for November.

REIT ETFs Over 1-Month Period (11/25-12/24)
Approximate % Gain
iShares Cohen Steers Realty Majors (NYSEARCA:ICF) 12.1%
Vanguard REIT (NYSEARCA:VNQ) 11.5%
iShares DJ Real Estate (NYSEARCA:IYR) 11.4%
iShares FTSE NAREIT Retail (NYSEARCA:RTL) 11.2%
iShares FTSE NAREIT Industrial/Office (NYSE:FIO) 10.7%
iShares FTSE NAREIT Residential (NYSEARCA:REZ) 9.1%
S&P 500 1.4%
SPDR DJ International Real Estate (NYSEARCA:RWX) -2.2%
iShares NAREIT Europe (NASDAQ:IFEU) -8.2%

A cynic might quip that the run-up in REIT ETF purchases is merely a function of year-end yield hunting. Yet quarterly income payments of 1.3% hardly accounts for a chase that resulted in 9%-10% in capital appreciation over the course of a single month.

So what accounts for the recent attractiveness of the so-called total return producers… these high dividend, moderate cap app gainers? Is it the return of asset allocation, where nearly every model typically includes some allocation to REITs? Is it the fact that the biggest REITs were able to raise enough capital in the financial crisis, and that they are now showing that they will indeed be survivors?

The latter explanation gives some credence to the higher percentage gains for Vanguard REIT and iShares Cohen & Steers. In essence, the largest, most diversified index-trackers outperformed the more selective (and more exposed) Residential REIT ETF and Mortgage REIT ETF.

Yet it’s hard for me to to see how prices in the real estate industry itself warrant the sudden enthusiasm. In spite of a troubled real estate environ with rising delinquencies and rising foreclosures, the stock market’s ability to drive REIT ETFs higher may not last.

Equally curious is the lack of love for foreign REITs. Both NAREIT Europe and DJ International Real Estate posted losses. Perhaps the sudden interest in the U.S. dollar, which happened to bottom out precisely 1 month to the day, has a lot to do with the share price pattern.

I will say it again: If it is high income coupled with some capital appreciation that you seek, the better risk-reward opportunities include ETFs like SPDR Barclays Capital Convertible Bond (NYSEARCA:CWB) and JP Morgan Alerian MLP (NYSEARCA:AMJ).

Disclosure Statement: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company does not receive compensation from any of the fund providers covered in this feature. Moreover, the commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.