The Best REIT ETFs For Your IRA

by: Joe Springer


Yields on Treasuries are staying stubbornly low.

But REITs are still giving good income.

We search the market for the best REIT ETFs for your IRA.

REITs are providing some of the market's best yield, and should have a place in your IRA. An ETF can be an especially good idea for the conservative investor, as it diversifies away the risk of individual stocks.

In this low interest rate environment, a REIT ETF in an IRA is a sound investment idea. But which one is best? Let's have a look.

Complete REIT Sheet

We'll start by running a screen for the largest ETFs. We want to make sure that there is sufficient size for the fund to be run efficiently, and provide ample liquidity. We'll screen for REIT ETFs with at least $100 million under management.

We will also only include equity REITs.

Equity REITs invest in property and are considerably more conservative than mortgage REITs that trade securities. Equity REITs are also likely the more sound investment, so we'll screen out the mortgage REITs.

There are fifteen REIT ETFs meeting our criteria: Vanguard REIT ETF (NYSEARCA:VNQ), SPDR Dow Jones International Real Estate ETF (NYSEARCA:RWX), iShares U.S. Real Estate ETF (NYSEARCA:IYR), iShares Cohen & Steers REIT ETF(NYSEARCA:ICF), SPDR Dow Jones REIT ETF (NYSEARCA:RWR), Vanguard Global ex-U.S. Real Estate ETF (NASDAQ:VNQI), SPDR Dow Jones Global Real Estate ETF (NYSEARCA:RWO), Schwab U.S. REIT ETF (NYSEARCA:SCHH), iShares International Developed Real Estate ETF (NASDAQ:IFGL), Shares Residential Real Estate Capped ETF (NYSEARCA:REZ), First Trust S&P REIT Index Fund (NYSEARCA:FRI), Ultra Real Estate ETF (NYSEARCA:URE), FlexShares Global Quality Real Estate Index Fund (NYSEARCA:GQRE), iShares International Developed Property ETF (NYSEARCA:WPS), and the PowerShares KBW Premium Yield Equity REIT Portfolio ETF (NYSEARCA:KBWY).

Most of the ETFs provide good income, but Ultra is left wanting, and KBW is a high-side outlier:

And the industry is indisputably dominated by Vanguard's VNQ, which owns more than half the market:

That size advantage is borne out in VNQ's low expenses, but Schwab has it beat:

And most of the funds have performed consistently well, Ultra especially so. But the SPDR International, Vanguard Global, and both iShares International funds have logged some negative returns:

Making Some Cuts

Real estate can be a very good currency inflation hedge, so there is a free bonus for American investors that stay domestic. Let's take advantage and cut the six international funds - SPDR Dow Jones International, Vanguard Global ex-U.S., SPDR Dow Jones Global, FlexShares Global, and the two iShares International funds.

That leaves us with nine ETFs.

Ultra Real Estate

Ultra has the best returns of any of the ETFs listed - but real estate has been in a bull market for the last five years. Ultra has never recovered from the baptism of fire it took when the fund launched.

Seed investors that held on were down more than 97% at one point.

The huge downside then, and the outperformance lately, are because Ultra is leveraged to provide double exposure to the index it tracks. It moves twice as much as the Dow Jones U.S. Real Estate Index.

REIT yields are much more appealing than Treasury yields right now, and we don't see Treasury yields rising. So we think the REIT sector will continue its bull run, and we actually think Ultra will continue to do very well.

But the losses can be too dramatic in a bear market. A 97% loss in an IRA in two years - in real estate no less - is not acceptable. Add to that the lack of yield because of the leverage instruments, and Ultra is dropped.

Drilling Down

We'll remove the iShares Cohen & Steers fund here as well. The index it follows, the Cohen & Steers Realty Majors Index, has just 32 constituents. In addition, most of its top holdings are the same as what can be found in the VNQ, and for a lower expense and higher dividend.

iShares Cohen & Steers fund top holdings:

Vanguard REIT ETF top holdings:

We'll also drop the iShares U.S. Real Estate ETF, which follows the Dow Jones U.S. Real Estate Index. That index has 119 stocks, vs 153 stocks for the MSCI US REIT Index, which is what the VNQ follows. There is a lot of overlap for the broad-based indices, but the Vanguard fund has the iShares fund beaten by every measure - returns, yield, expenses, liquidity.

Spider and Schwab

Then there is the SPDR Dow Jones REIT ETF and the Schwab U.S. REIT ETF. They both follow the Dow Jones U.S. Select REIT Index.

Though both funds follow the same index, they have erratic distributions, and the yield can come in high or low.

The Dow Jones U.S. Select REIT Index has 98 constituents, and again, they are the usual suspects:

The Vanguard fund beats the SPDR and Schwab funds by most measures, and the small savings on expenses for Schwab does not make up for the unreliable dividend. We will give the nod to VNQ over these two, and remove them from the list.

All Residential

The iShares Residential Real Estate Capped ETF is an interesting fund. It follows the FTSE NAREIT All Residential Capped Index, which is comprised of residential, healthcare, and self storage real estate.

The expense ratio is a little higher for the fund, but it is invested in less liquid names than the larger funds. In addition, a lot of REITs have clients that could fall prey to Amazon, and this fund is not exposed to that threat. We think REZ is a winner.

Thank God it's FRI

The First Trust S&P REIT Index Fund tracks the S&P United States REIT Index, which has 156 members. This fund's constituents are very similar to the VNQ's, but the Vanguard fund once again wins on every metric. Dropped.

KBWY News Radio

KBWY tracks the KBW Premium Yield Equity REIT Index, which is comprised of 29 micro, small, and mid cap REITs. This is an interesting fund, and complements the VNQ very well, which is mostly mid and large cap. As with REZ, the expenses are a little higher, but again the stocks are not as liquid. And that lofty yield is paid monthly. We like KBWY.

The Winners

Here we have what we consider the best REIT ETFs for your IRA:


REITs are providing some of the market's best yield, and should have a place in your IRA. ETFs can help diversify away the risk of individual stocks, and a REIT ETF in an IRA is an especially good idea in this low interest rate environment. We think the best three REIT ETFs for your IRA are the Vanguard REIT ETF, iShares Residential Real Estate Capped ETF, and PowerShares KBW Premium Yield Equity REIT Portfolio ETF.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.