REITs -- Part 1: Rank Equity REIT ETFs By Total Return And Volatility-Based Probable Return

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Includes: FRI, FTY, ICF, IYR, REZ, RWR, VNQ
by: Richard Shaw

Equity REITs are of interest to yield seeking investors who also favor hard assets and the prospect of rising portfolio income. In addition to yield, investors should be concerned about total return and volatility, particularly if they are in the withdrawal stage of their economic lives.

There are 27 non-mortgage equity REIT ETFs listed by NAREIT. We knocked out one 2X leveraged equity REIT ETF to settle on 26 ETFs to examine here.

In this article, we present the calendar total returns for 10 calendar years, and the probable outside boundaries of return for any given year based on 3-year volatility versus the 3-year mean return.

In subsequent, articles in this series, we will discuss other attributes of equity REIT ETFs and individual equity REITs. This article, however, is focused on the total return equity REIT ETFs.

The 26 Equity REIT ETFs:

REZ iShares FTSE NAREIT Resid Plus Cp Idx
VNQ Vanguard REIT Index
FTY iShares FTSE NAREIT Real Estate 50
RWR SPDR Dow Jones REIT
FRI First Trust S&P REIT Idx
IYR iShares Dow Jones US Real Estate
ICF iShares Cohen & Steers Realty Majors
IFNA iShares FTSE EPRA/NAREIT North America
FFR First Trust FTSE EN Dev Mkts Rel Est Idx
RTL iShares FTSE NAREIT Retail Cp Idx
FNIO iShares FTSE NAREIT Industrl/Offc Cp Idx
IFEU iShares FTSE EPRA/NAREIT Dev EU Idx
RWX SPDR Dow Jones Intl Real Estate
WPS iShares S&P Dev ex-US Property Index
IFAS iShares FTSE EPRA/NAREIT Dev Asia Idx
IFGL iShares FTSE EPRA/NAREIT Dev RE ex-US
DRW WisdomTree Global ex-US Real Estate
RWO SPDR Dow Jones Global Real Estate
SCHH Schwab US REIT
VNQI Vanguard Global ex-US Real Estate
GRI Cohen & Steers Global Realty Majors
ROOF IQ U.S. Real Estate Small Cap
PSR PowerShares Active U.S. Real Estate
WREI Wilshire US REIT
KBWY PowerShares KBW Prem Yield Equity REIT
FRL Focus Morningstar Real Estate
Click to enlarge

Figure 1:
The 26 REIT ETFs Ranked by 2008 Calendar Year Total Return:

REIT ETFs that suffered the least declines in 2008 may be of greater interest. It is uncertain, of course, but it may be reasonable to assume that those that did best in 2008, might be likely to be stronger in the next major downturn as well.

Figure 2:
The 26 ETFs Ranked by 3-Yr Total Return Less 2 Standard Deviations of Return:

Even though stocks do not follow perfect normal ("bell curve") distribution of returns, normal distribution math is a broadly helpful tool in estimating what range of greatest to least return is most probable in any given year. Black Swans can and do happen, but most of the time they do not.

This table shows not only the rolling total returns for 1-month, 3-months, 1-year, 3-years, 5-years and 10-years; it also shows the 3-year mean return plus 2 standard deviations of return, and minus 2 standard deviations of return. In a normal distribution world, those two returns would encompass the annual expected next year annual return for about 96% of likely outcomes. That other 4% could be tragic, but the 96% defines what is generally thought to be most likely.

It is an imperfect estimation tool, but one of many tools that you might want to take into consideration.

Figure 3:
The 7 Best ETFs by 2008 Return and Probable Worst Return:

From Figures 2 and 3, we list the best 7 ETFs side-by-side. With minor order changes, the same ETFs that did best in 2008 (4+ years ago) also score best in terms of 96% probable worst case expected return based on the last 3 years.

Figures 4 and 5:
Charts of Best 7 ETFs vs S&P 500:

Those 7 equity REIT ETFs beat the S&P 500 (proxy: SPY) hands down since the US stock market bottom in March of 2009.

Figure 6:
The 4 Worst ETFs vs the S&P 500:

The worst 4 performers that also had at least 3 years of history, were all non-US real estate stories. They did better than the S&P 500 most of the time, but fell harder when the S&P 500 fell, as is the case at this time.

Apartment REITS have been the star performers, and will probably continue to do so until home ownership becomes more affordable, mortgages become more available, inventory and shadow inventory clears, and prices show signs of consistent recovery.

Asian real estate may be suffering from fears of bubble, and European real estate may be suffering from fears of recession. Those are off the cuff speculations, but the factual matter is that they are underperforming, and show a tendency to retrench strongly when the S&P 500 dips.

Best Yield Among Lowest Risk Equity REIT ETFs:

FTY, IYR and VNQ have the highest trailing distribution yields among the 7 ETFs that we identified as being lower risk as measured by 2008 return and 96% probable worst case return.

Disclosure: QVM has positions in VNQ as of the creation date of this article (May 13, 2012).

General Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.