REITs Cool after 7-Year Run

May 23, 2007

SAN DIEGO (ETFguide.com) - A number of market observers have been predicting a severe downturn in the price of real estate investment trusts (REITs). While that hasn't yet happened, the seven year run of outsized gains for REITs appears to be cooling.

The 2007 performance of exchange-traded funds (ETFs) that hawk major REIT indexes has been subpar versus popular equity indexes, such as the Dow Industrials, S&P 500 and S&P Midcap 400. The year-to-date return for SPDR DJ Wilshire REIT (Ticker: RWR) was a minus 0.63 percent return, while the iShares Cohen & Steers Realty Majors (Ticker: ICF) was down 1.86 percent. In contrast, the MidCap SPDRs (Ticker: MDY) is ahead by 13.14 percent while the S&P 500 SDPRs (Ticker: SPY) has gained 8.05 percent.

Investors have traditionally flocked to real estate investment trusts (REITs) for dividends, but over the past few years they've been getting a lot more: high-octane capital growth.

According to the National Association of Real Estate Investment Trusts (NAREIT), an industry trade group based in Washington DC, equity REITs recorded gains of 35.06 percent in 2006.

Most of the broad index REIT ETFs have exposure to all the important real estate segments including apartment, office, retail, and industrial properties.

In February, REITs peaked on takeover news when Blackstone Group of New York finalized its $23 billion acquisition of the nation's largest owner of office real estate, Equity Office Properties. Since that point, REITs have sputtered.  

Still, the halt in capital growth of REIT shares hasn't slowed the pace of new funds tracking the sector.

Barclays Global Investors recently launched sub-sector five ETFs based upon FTSE NAREIT indexes. The funds offer concentrated exposure to narrow real estate segments.

Expense ratios for REIT ETFs range between 0.12 to 0.48 percent, with the Vanguard REIT fund having the lowest.

--iShares FTSE NAREIT Real Estate 50 (Ticker: FTY)

--iShares FTSE NAREIT Residential Index Fund (Ticker: REZ)

--iShares FTSE NAREIT Industrial/Office (Ticker: FIO)

--iShares FTSE NAREIT Retail (Ticker: RTL)

--iShares FTSE NAREIT Mortgage REITS (Ticker: REM)