Find Above-Market Returns With Specialty Real Estate ETF

| About: iShares U.S. (IYR)

As investors continue to look for a bottom in residential real estate, some areas of property management continue to generate positive, and even above-market, returns.

Commercial real estate has seen some of the major ups and downs that the rest of the market experienced in the last decade, but certain specialty companies have beaten the downturn. The Dow Jones U.S. Real Estate Index Fund (NYSEARCA:IYR) contains a good mixture of retail and specialty real estate companies, while mostly avoiding the homebuilders and financial stocks that suffered heavily in the housing crisis.

Like most ETFs, the IYR is weighted by market capitalization. By including some specialty real estate stocks, the ETF has been able to provide returns above the general market returns over the short and long term:

Average Annual Returns as of 12/31/11
1 Year 3 Year 5 year 10 Year
IYR 5.6% 20.2% -3.1% 8.6%
SPY 1.2% 39.4% -0.4% 2.8%

If you are still holding a stock like MPG Office Trust (NYSE:MPG), which declined from around $40 to $1 and has only bounced back to $2.60, or a similar disastrous scenario from Beazer Homes (NYSE:BZH), you might be surprised at the solid recovery of the IYR.

This is partially accomplished by holding the better of commercial retail stocks, with Simon Property Group the largest holding as of February 17, 2012. The other main reason is the ability to hold stocks that might not be readily thought of as real estate:

  • The second largest holding is American Tower (NYSE:AMT) which, according to Yahoo Finance, "develops, owns, and operates communications sites; and leases antenna space on multi-tenant communications sites"
  • Coming in third is Public Storage, which "engages in the acquisition, development, ownership, and operation of self-storage facilities in the United States and Europe"

Together these three heavyweights comprise 18.32% of the IVR holdings, as of 2/17/12. Instead of focusing on a potential bottom in residential real estate, investors need to keep an open mind on specialty real estate to get above market returns.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.