Three ETFs that Package REITs
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Real Estate Investment Trusts, otherwise known as REITs, should be part of every investor’s portfolio. These investments deliver returns that are not correlated to the traditional equity and fixed income markets. It has been proven that the longer the holding period of REIT ownership the less the correlation to these markets. REITS make a great diversifier.
REIT returns come from a few different sources. Due to the structure, all cash flow after all expenses flow to the share holder in the form of dividends. Per IRS guidelines, a REIT must pass at least 90% of this cash to the shareholder. Another source of returns is the indirect ownership of real estate. REITs tend to be specific and will hold certain types of real estate based on industry or geographical location. Real estate markets throughout the country tend to be fragmented and what happens in one area of the country may have very little effect on real estate in other regions. Since there any numerous REITs in existence and for the investor that does not want to perform the due diligence to examine each one, ETFs based on certain REIT indexes make an attractive alternative. Here are three to consider.
The First Trust S&P REIT Index Fund (NYSEMKT: FRI) is based on the S&P United States REIT Index. FRI was started in May of 2007 and even with the events of later 2008 has delivered positive returns in all traditional reporting periods. FRI has 120 holdings and rebalances on a quarterly basis. The top holding is Simon Property Group Inc. (NYSE: SPG), which represents 10.87% of the portfolio. This places FRI highly susceptible to the market movements of SPG. FRI deserve further inspection by the individual investor and additional data can be found on http://www.ftportfolios.com/Retail/Etf/EtfSummary.aspx?Ticker=FRI
The Wilshire US REIT ETF (NYSEMKT: WREI) tracks the Wilshire US Real Estate Investment Trust Index and holds 92 securities. This is a float-adjusted market weighted index. The top holding of WREI is Simon Property Group Inc. (NYSE: SPG). WREI has 11.58% of its holdings in this REIT. This is a fairly new REIT as its inception date is Mar of 2010. The expense ratio is reported at 0.32%. WREI is worth a closer look and fund information is published on this link http://www.guggenheimfunds.com/etf/fund/wrei
The iShares Dow Jones US Real Estate Index Fund (NYSEMKT: IYR) is designed to replicate the Dow Jones US Real Estate Index. IYR as 85 holdings and like the other REITs discussed, the largest allocation goes to Simon Property Group Inc. (NYSE: SPG). This ETF has 9.06% of its value placed in SPG. The inception date is listed as Jun of 2000 and the reported returns for all periods are attractive. IYR did hold up well during the crisis of 2008. The fund family has given lots of data and it can all be seen on this webpage http://us.ishares.com/product_info/fund/performance/IYR.htm
A significant part of the returns from REITs is the dividend payments. A price chart evaluation will not give an accurate reflection on how holding shares in REITs are beneficial in the long run. Deriving cash flows from different property types and different geographical locations is a proven method to diversify a real estate portfolio from factors that can negatively impact equity returns.
Jeffrey L. (Jeff) Stouffer is an Investment Advisor Representative and manages the Alexandria VA office of Kingsview Asset Management. As a practicing financial advisor serving the needs of individuals and small businesses, he believes in using a wide range of investment strategies, including alternative investments. All strategies are client centric and unique. He can be reached at jeff.stouffer@kingsviewassetmanagement.com and is available to answer any questions about this combined approach.
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