Timing the Real Estate Market With iShares' New Sector REITs

Barclays Global Investors [BGI] launched five new iShares REIT exchange-traded funds onto the NYSE Arca Exchange on May 4. The funds offer U.S. investors the ability to slice and dice the U.S. REIT marketplace into different 'sectors.'

The funds and tickers are:

• iShares FTSE NAREIT Residential (REZ)
• iShares FTSE NAREIT Industrial/Office (FIO)
• iShares FTSE NAREIT Retail (RTL)
• iShares FTSE NAREIT Mortgage REIT (REM)
• iShares FTSE NAREIT Real Estate 50 (FTY)

The thinking is that different parts of the real estate market operate on different cycles, so investors can use the different funds to fine-tune exposure or to try to "time" the REIT market. While that’s not always the best idea, it may make sense in the REIT market, as the different underlying sector indexes perform very differently.

Recently, for instance, the market for corporate office space has been very strong in the U.S, while the U.S. residential market has been crumbling. That plays out in the indexes: according to iShares, the FTSE NAREIT Industrial/Office Index (FIO) has outperformed the Residential index by a stunning 16+ percent over the past six months.

The table below compares the recent performance each of the five underlying indexes. The Real Estate 50 index can be considered a proxy for the broader REIT market, as it is a sample of the fifty largest REITs in the U.S.

The number and differences are impressive. Looking just at 1-yr performance, the difference between the best and worst performing sector was 39.1 percent. That is significantly larger than the 25 percent performance differential between the best and worst performing sector in the S&P 500 in 2006 (Telecom, up 31.7 percent, vs. Health Care, up 6.1 percent).

Even over ten years, the performance has varied dramatically, with Retail REITs delivering the strongest returns and Mortgage REITs lagging.

The new ETFs charge a uniform 0.48 percent in annual expenses. Components for each fund are drawn from the broader FTSE NAREIT Composite Index. The prospectus is available here.