The last decade has seen the emergence of REITs – real estate investment trusts. These trusts invest directly in real estate projects or companies and pass on their earnings to investors as dividends. Thanks to their structure, REITs offer the small investor a unique opportunity to invest in big ticket real estate projects and companies. Consequently, REIT ETFs have become an important part of most long term investment portfolios. REIT ETFs are also very popular with retirement investment planning as they offer people with smaller portfolio sizes the opportunity to invest in real estate for the long term.
U.S. REIT ETFs were hit hard following the 2008 Credit Crisis which itself was caused by the U.S. real estate collapse. Having said that, U.S. REIT ETFS have performed phenomenally well in the last three years, beating all asset classes with the exception of gold. This makes asset allocation to U.S. REIT ETFs a must for long term portfolios like IRA investments and 401K investments. Check out the table below for a systematic comparison of various asset classes.
Major Asset Classes Trend
11/15/2011
Description | Symbol | 1 Week | 4 Weeks | 13 Weeks | 26 Weeks | 52 Weeks | Trend Score |
Gold | -0.1% | 7.12% | -0.32% | 19.77% | 32.37% | 11.77% | |
Commodities | -1.72% | 1.56% | -3.48% | -2.37% | 14.26% | 1.65% | |
US Equity REITs | -3.11% | 5.38% | 0.95% | -4.88% | 12.81% | 2.23% | |
US Stocks | -1.42% | 3.24% | 5.83% | -5.14% | 9.84% | 2.47% | |
Total US Bonds | -0.12% | 0.85% | 0.73% | 4.12% | 6.06% | 2.33% | |
International Treasury Bonds | -2.03% | -1.21% | -3.94% | 0.22% | 5.65% | -0.26% | |
International REITs | -3.74% | -1.62% | -6.3% | -13.55% | -4.26% | -5.89% | |
Emerging Market Stks | -3.48% | 3.33% | -3.71% | -13.25% | -6.58% | -4.74% | |
International Developed Stks | -3.63% | -1.76% | -4.88% | -14.67% | -6.84% | -6.36% |
See here for a detailed analysis of asset class performance.
Let us now examine the performance of the most popular and liquid U.S. REIT ETFs trading in the international market.
U.S. REITs
11/11/2011
Description | Symbol | 1 Yr | 3 Yr | 5 Yr | Avg. Volume(K) | 1 Yr Sharpe |
iShares Cohen & Steers Realty | 10.54% | 22.55% | -2.97% | 739 | 46.15% | |
SPDR Dow Jones REIT | 9.02% | 22.74% | -2.06% | 283 | 40.41% | |
Vanguard REIT Index ETF | 8.1% | 24.69% | 0.13% | 2,693 | 36.88% | |
iShares Dow Jones US Real Estate | IYR | 6.67% | 22.75% | -2.95% | 11,802 | 31.7% |
See here for more on ETFs linked to different asset classes.
From the table given above, we find that ICF has given the best return (10.54%) and has the highest Sharpe ratio (46.15%) in the last year. However, it has a relatively lower daily average volume (739K). On the other hand, VNQ has given the highest medium term return (24.69% - three years) and has decent daily average volume (2,693K) making it a better long-term investment candidate. The following tables will allow us to take a closer look at VNQ’s core holdings and asset allocation.
Top 10 Holdings (47% of Total Assets) |
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Equity sector diversification
REIT ETF | MSCI US REIT Index | ||
as of 10/31/2011 | as of 10/31/2010 | as of 10/31/2011 | |
Diversified REITs | 6.80% | 8.40% | 6.80% |
Industrial REITs | 5.30% | 5.70% | 5.20% |
Office REITs | 15.70% | 16.60% | 15.70% |
Residential REITs | 18.50% | 16.50% | 18.40% |
Retail REITs | 26.60% | 25.30% | 26.50% |
Specialized REITs | 27.10% | 27.40% | 27.40% |
VNQ is an REIT ETF which tracks the MSCI US REIT Index; a gauge of REITs and real estate stocks. Its current net total assets equal $19.9 billion, making it one of the larger REIT ETFs in the U.S. market. VNQ’s largest holding - Simon Property Group Inc (10.33%) - is one of the biggest retail REITs in the U.S. Similarly, VNQ’s portfolio allocation shows a good balance of specialized REITs (27.10%) and retail REITs (26.50%). Specialized REITs are relatively less sensitive to an economic or real estate down turn and help stabilizing VNQ’s REIT portfolio. At the same time, retail and office REITs have a higher co-relation to the general economic environment and they tend to outperform in low interest rate scenarios.
In conclusion, U.S. REIT ETFs like VNQ should occupy a significant place in every long-term investment portfolio and short-term price volatility should be used as an advantage to buy into such ETFs.
Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
