Real Estate ETFs For Growing The Retirement Portfolio

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Includes: ICF, KBWY, REZ, RWR, SCHH
by: Joseph P. Porter

Summary

Real estate ETFs not only provide excellent growth potential for the retirement portfolio, but also provide good dividend opportunities.

The 13 ETFs considered for this article have an annualized five-year growth rate of more than 17%.

Two of the ETFs discussed are almost exactly the same, but for one rather odd holding that one of the ETFs has.

In this article I identify five ETFs that focus on the real-estate sector. This may be a case of saving the best for last, as these ETFs not only provide excellent growth opportunity for the retirement portfolio, but do so in a big way; of the real estate ETFs, the average annualized growth rate over the past five years is 17.09%, with the five selectees averaging 17.79%.

In contrast, of the other sectors that have been covered,

  • Healthcare ETFs averaged 23.38%, with selectees averaging 22.85%;1
  • Information technology ETFs averaged 14.59%, with selectees averaging 15.40%;
  • Newer info-tech ETFs 13.35%, with selectees averaging 17.20%;
  • Consumer defensive ETFs averaged 12.73%, with selectees averaging 15.54%;
  • Utilities ETFs averaged 8.55%, with selectees averaging 11.27%.

Healthcare is the only sector to beat the growth of real estate thus far. However, there is a second reason why real estate ETFs are attractive investments: real-estate ETFs provide an average dividend yield of 3.33% - with the selectees providing an average of 3.40% - whereas healthcare yields were on the order of 0.53% and 0.79%, respectively. In fact, only utilities ETFs come close to the real-estate sector, with averages of 3.20% in general, and 3.30% for selectees.

Real-estate ETFs thus seem to be the best of both worlds.

Selection Criteria

For those unfamiliar with my other growth-oriented-ETF articles, selection of the top five ETFs in the sector is based on the application of nine equally weighted factors:2

  • Assets under management (AUM);
  • Price to earnings (P/E);
  • Price to book value (P/B);
  • Performance, year to date (YTD);
  • Performance, annualized five-year;
  • Index tracking ratio (ITR);
  • Percentage of weighted holdings comprising top 33% of assets;
  • Dividend yield;
  • Expense ratio (ER).

Selectees

My sources3 provided a list of 13 ETFs that focused on the real-estate sector in the U.S. For once, neither First Trust Portfolios L.P., The Vanguard Group, Inc., nor Guggenheim Investments are represented among the selectees; the top-five ETFs are from Invesco Distributors, Inc., BlackRock, Inc., Charles Schwab Investment Management, Inc., and State Street Global Advisors.

The top five ETFs in the real-estate sector are:

  • PowerShares KBW Premium Yield Equity ETF (NASDAQ:KBWY);4
  • iShares Residential Real Estate Capped (NYSEARCA:REZ);5
  • Schwab U.S. REIT ETF (NYSEARCA:SCHH);6
  • iShares Cohen & Steers REIT ETF (BATS:ICF);7
  • SPDR Dow Jones REIT ETF (NYSEARCA:RWR).8

Three of the ETFs (PowerShares and the two iShares) are small, having just over 30 holdings in each; the remaining two are much larger, with the SPDR having 91 holdings and Schwab having 92. Unlike many of the ETFs in the previous articles in this series, there are some real differences to be had among these ETFs, particularly the smaller ones.

As we will see, there is almost literally no difference between the two larger ETFs.

The ETFs finished in the order in which they are listed above, with PowerShares getting the highest score and the SPDR scoring the lowest of the top five; while I have discussed the ETFs in their scoring order in the past, I will deviate from that a bit here. I will discuss the smaller ETFs first, and then deal with the larger ETFs together.

Before turning to the ETFs themselves, I thought it might be helpful to add some context for the data I present for each fund, so - for the 13 original "contenders":

  • average expense ratio: 0.41%
  • average AUM: $2.81 Billion, median: $199.19 Million
  • average P/E: 74.13
  • average P/B: 2.14
  • average dividend yield: 3.33%
  • average annualized performance: 17.09%
  • average performance YTD: 16.76%

PowerShares' KBWY ended up scoring significantly higher than the second-place REZ; it managed to do so by having the highest ITR (117.07%) of all ETFs considered as well as the highest ranking in top-thirty-percent holdings (28.13% - almost equal weighted). The fund was also second in annualized performance (20.71%), yield (4.91%) and P/B (1.64).

The only weakness in KBWY's numbers is its performance (YTD) - a second-lowest 9.69%. What is intriguing is that the only fund with a lower YTD performance - at 7.39% - is also the only fund with a higher five-year annualized performance - at 23.67%.9

iShares' REZ has led the pack in terms of YTD performance, at 21.61%; no other fund is within 150bps of that growth, and most are further behind than that. Its annualized performance is 17.89%, putting it third overall. The fund has one of the lowest P/Es overall, above average P/B, and a healthy yield.

REZ does have some difficulty in tracking its index, coming in with an ITR of 85.11% - third lowest ITR overall. Its ER is on the higher side.

iShares' other ETF, ICF, managed to come in behind its sibling, despite the fact that it seems superior to REZ in some ways. ICF has the larger AUM by a dozen-fold and its ER is 13bps lower. However, while its performance is among the best, both YTD (19.99%) and annualized (16.68%), these trail its sibling by not-insubstantial margins.

ICF loses ground on a couple of other factors, as well. Its dividend yield is fourth-lowest overall, and its ITR is second lowest (at 82.75%), also overall. Comparing the two iShares funds shows that bigger is not always better.

The Strange Case of Charles Schwab and State Street

Compare the two tables below:

I find these two ETFs to be interesting10 in several respects, not only from an investment perspective: ultimately, these funds can teach us a great deal about the functioning of ETFs, not to mention the lessons they have to teach in decision theory, existential angst and metaphysical perplexity.11

Both SCHH and RWR are based on the same index: the Dow Jones U.S. Select REIT Index. Both funds follow the index very closely. I compared the holdings of the two funds and found that the weightings of their holdings (based on market capitalization) were virtually identical.

For all intents and purposes, most weighting differences that exist can be accounted for by taking into consideration the fact that RWR has almost triple the assets under management as SCHH; that is, the differences are frequently no more than a matter of RWR's ability to achieve a greater level of precision in its weightings due to dynamics of scale.12

Inasmuch as the funds are based on the same index, one would expect them to have other significant similarities, and they do: their P/E and P/B are very close; they have the same top ten holdings in the same order; and the top ten account for almost the same percentage of the funds' AUMs.13

As already noted, there are some obvious material differences: I have already discussed how they differ in AUM and ER; RWR has a share price more than twice that of SCHH; RWR has a higher dividend yield than SCHH.14

There is one more important difference to consider, and it involves their holdings: SCHH has one more holding than RWR, and that holding is … wait for it … RWR!15,16

Since RWR and SCHH are, in all other respects (with regard to their holdings) the same, the addition of RWR to SCHH's holdings would seem to leave the two ETFs identical, since owning RWR is to own the exact same basket of goodies that SCHH had to begin with. Proportionately, SCHH has nothing more or less than it would have if it did not have RWR.

What is most interesting is this: RWR's performance, both YTD and annualized, is lower than that of SCHH. At the same time, RWR's yield is more than half of a percentage point larger than that of SCHH (61bps to be exact) - despite the fact that SCHH has a significantly smaller ER! This would seem to indicate that the reason SCHH is outperforming RWR is because it owns shares of RWR,17,18 and despite the fact that RWR pays better dividends.19,20

Assessment

All things considered, KBWY seems to properly own first place among the final five selected ETFs: it offers superior growth and superior yield - an unbeatable combination, and even more so when one takes into account the low share price of KBWY.

All other things being equal, the real choice here seems to be between KBWY, REZ and ICF. These three funds do require that the investor examine their holdings to see which fund best suits the investor's attitudes.

As for SCHH and RWR, if all things are equal, I would turn to the ETF having the lower ER; however, all things are not equal here, and the superior yield of RWR trumps SCHH's lower ER. Yield also trumps price - again, all else being equal.

This will be the last of my growth-oriented articles for a while. The only other sector that has been performing well over the past few years - and which might be sure to continue its growth - is the industrial sector. I will discuss this sometime before the end of the year, but I have some other issues I would like to bring up.

Disclaimers

This article is for informational use only. It is not intended as a recommendation or inducement to purchase or sell any financial instrument issued by or pertaining to any company or fund mentioned or described herein.

All data contained herein is accurate to the best of my ability to ascertain, and is drawn from the ETFs' homepages to the extent possible. All tables, charts and graphs are produced by me using data acquired from the ETFs, ETF.com and Morningstar, Inc.; historical price data from Yahoo! Finance. Data from any other sources (if used) is cited as such.

All opinions contained herein are mine unless otherwise indicated. The opinions of others that may be included are identified as such and do not necessarily reflect my own views.

Before investing, readers are reminded that they are responsible for performing their own due diligence; they are also reminded that it is possible to lose part or all of their invested money. Please invest carefully.

1 This is the only sector where the selectees average less growth than the sector as a whole. The reason is that the sub-sectors of pharmaceuticals and biotechnology each have fewer ETFs covering them, but they have extraordinary growth rates (averaging well over 24% annualized). The subsectors contributed only one ETF each to the selectees, the other three selected ETFs covering the healthcare sector in general.

2 The most current version of the explanation of each of the criteria can be found here. The only alteration has been to the P/E criterion, which is now based on trailing earnings rather than projected.

3 As usual, ETF.com and Merrill Lynch Bank of America, a division of Bank of America Corp. (NYSE:BAC).

4 KBWY homepage.

5 REZ homepage.

6 SCHH homepage.

7 ICF homepage.

8 RWR homepage.

9 IQ U.S. Real Estate Small Cap ETF (NYSEARCA:ROOF), by IndexIQ. ROOF ended up in sixth place, by a small margin. ROOF also has the only higher yield (5.91%) and the lowest P/B (1.35) compared to KBWY.

10 Not to mention amusing.

11 A philosopher by education, vocation and avocation, I just love stuff like this.

12 I would imagine the same dynamics of scale would account for why RWR's expense ratio is more than three times that of SCHH.

13 They both have the acronym "REIT" in their titles. Similarities abound!

14 Yes, I know. There is a lot that goes into determining the dividends paid out. Perhaps most important is the fact that, despite its smaller size, SCHH has almost as many shares outstanding as RWR, 28.1 million to 32.63 million. Thus, it is distributing much lower earnings to almost as many shares.

15 Yes! SCHH has devoted 0.09% of its assets to its "competition," as it were. RWR has apparently decided not to return the favor.

16 The metaphysical implications of this maneuver by SCHH are profound, indeed. Fortunately, RWR was started in 2001, and SCHH was started in 2011. Consider the ramifications had SCHH been initiated before RWR, yet still with RWR among its holdings!

17 After all, this is the only difference between the two funds.

18 That, plus the fact that shares of SCHH cost a lot less than shares of RWR.

19 Maybe SCHH could change this if they increased their holdings of RWR … ?

20 I must confess to having a lot of fun with this.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.