No Sign of Negative Returns in this Real Estate ETF

Jeff is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It is not too often when a real estate investment strategy under review has posted positive returns, for all measuring periods, since inception. This once-in-a-blue-moon program is the iShares Dow Jones US Real Estate Index Fund (NYSEMKT: IYR), a well-diversified ETF that was created on June 12, 2000, that holds 95 different REITs and pays a nice dividend. One attractive feature of the ETF is that only approximately 8.4% is held in mortgage REITs, today’s predicted troublespot. See the allocation and price charts below.

Since the diversification that is imposed by the construction of the underlying index is the key, looking at the current top holdings will give an indication as to what is driving the returns. Speaking of returns, the one-year return is 20.03%, the three-year return is 17.75%, and the five year return is 5.39%. A program that can post positive returns with the influences of market conditions in 2008 and 2009 deserves a deeper look.

The top weighted REIT in the iShares Dow Jones US Real Estate Index Fund is Simon Property Group, Inc. (NYSE: SPG). This position, as of May 6, 2013, makes up 8.3% of this ETF, and its one-year return is 18.57% (see chart below). Simon Property Group owns and manages malls, outlet centers, community-lifestyle centers, and some international properties.

The company's first quarter 2013 earnings announcements included funds from operations at $2.05 per share (diluted) versus $1.82 for the same quarter of 2012. REITs use this a measure of reporting instead of earnings per share. Included in this report were the facts that the release of occupancy rates increased by 1.1% and tenant sales per square foot increased by 5.3%. One of the factors I don’t like is the share price--I feel that this level makes it harder to earn better returns.

Next in declining order of holding size within the ETF is a very unique REIT: American Tower Corp (NYSE: AMT). This holding is approximately 5.1% of the ETF and has delivered a one-year return of 25.84% (see chart below). American Tower specializes in the ownership, operation, and development of cell phone towers. It seems to me that as wireless communications expand, the demand for supportive antenna systems will follow.

Per the first quarter 2013 release, increases in 4G and LTE wireless technology are drivers of the 15.2% increase in revenue. Adjusted funds from operations grew by 9.9%. I like the long-term outlook for this REIT.

The next smallest company by weight within the ETF is HCP, Inc. (NYSE: HCP), a REIT that owns and operates healthcare-related properties such as medical offices, hospitals, senior housing, and skilled care centers. This REIT accounts for about 3.8% of the iShares Dow Jones US Real Estate Index Fund. The one-year return is 36.91% (see chart below), and the outlook for healthcare related business remains strong, despite changes on the horizon.

The first quarter 2013 earnings release stated that the funds from operations grew $0.74 per share versus $0.67 for the same quarter in 2012 (adjusted). I like how this is performing, and look forward to HCP continuing to grow in terms of both price and dividends paid.

Completing the list of top holdings is another specialty REIT, Public Storage (NYSE: PSA). Public Storage has about 3.7% of the iShares Dow Jones US Real Estate Index Fund, and gave a one-year return of 22.44%. The company's main business is the acquisition, development, ownership, and management of public self-storage containers.

The first quarter earnings report of 2013 will be released on Thursday, May 9, 2013. Looking back at the last quarter of 2012, net income allocatable to shareholders increased to $0.112 per share (diluted) versus $0.96 for the same quarter of 2011. The dividend increased by 14%, too, and most of the gain was attributed to favorable foreign currency exchange rates. The increased new home buying and relocation will drive the demand for public storage space, so you should definitely keep an eye out for the company's upcoming report.

The iShares Dow Jones US Real Estate Index Fund offers investors a simplified method to acquire a broad range of real estate ownership without having to search for the appropriate REITs. Factors such as high share price and over-concentration to predicted weakening sectors of the market have done well. The design of this ETF has done well and been tested by all types of market and industry cycles since its inception.

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Jeff Stouffer has no position in any stocks mentioned. The Motley Fool recommends American Tower . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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