REIT ETFs have been gaining popularity for investors looking for exposure to the real estate market, while avoiding the risk associated with picking individual winners and losers within the space. ETFs allow investors access to baskets of equities, reducing overall risk as opposed to holding a few stocks. Of course, the use of ETFs in lieu of a handful of well-selected stocks can also limit your profit potential. It's the classic risk versus reward and boils down to individual investor preferences and risk appetite.
With the REIT ETF space growing, which ETFs are outperforming their peers? This multipart series will examine the performance and risk of several ETFs in the real estate space. In this first installment, we will pit the following REIT ETFs against one another:
REM - iShares NAREIT Mort Plus Capped Index
RWR - SPDR Dow Jones REIT
WREI - Wilshire US REIT ETF
PSR - PowerShares Active U.S. Real Estate
ROOF - IQ U.S. Real Estate Small Cap ETF
Consistent high dividend income is generally expected when it comes to REITs. The following table shows the current yield based on the last 12 months of distributions for each ETF included in this article.
Yield (trailing 12 month)
iShares REM is the clear winner when it comes to yield, boasting an impressive 11.28% yield. Reinvesting this large payout can lead to a substantial yield on cost in years to come. The simple math shows that the initial investment will be paid for within nine years and the yield on initial cost could approach 30% in 10 years. That's some serious cash flow.
iShares REM also finishes on the top spot when it comes to risk-adjusted performance. The table below gives Sharpe ratios for each of the five ETFs based on the last 12 months' average returns. A risk-free rate of 0.10% was used in the calculation and is the current 3-month US Treasury rate. REM hasn't produced the largest returns over the last 12 months from the group. However, it has experienced the least amount of volatility, which is considered the risk component of the Sharpe ratio. An investor must weigh whether the extra 4.65% return generated by ROOF is worth the extra 8.37% in volatility.
For each of the ETFs reviewed in this article, REM has to come out as the clear winner. It blows away the competition when it comes to yield and also leads the way in risk-adjusted performance. In this case, yield is king.