REITs Offer Shelter

September 29, 2008

SAN DIEGO (ETFguide.com) - 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: capital growth.

According to the National Association of Real Estate Investment Trusts (NAREIT), an industry trade group based in Washington DC, its composite equity REIT index has enjoyed compounding returns of 5.04 percent over the past 10 years.* On top of these performance gains, REIT investors collected another 6.99 percent in the form of dividend income.  Over the same time period, the S&P 500 posted average gains of 4.67 percent.

REITs are publicly traded companies that invest in real estate.

To be qualified as a REIT under IRS guidelines, a company must invest at least 75 percent of total assets in real estate; derive at least 75 percent of gross income as rents from real property or interest from mortgages on real property; and make annual distributions of at least 90 percent of taxable income in the form of shareholder dividends.

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Highly regarded individuals in the investment community like David Swensen continue to advocate real estate too.

In his book Unconventional Success: A Fundamental Approach to Personal Investment (Free Press 2005) he recommends a 20 percent allocation to real estate in a diversified investment portfolio. Swenson manages Yale University's endowment which recorded a 28 percent gain last year.

Now that the U.S. economy is sputtering, REITs are offering investors some shelter.

Through last week the SPDR DJ Wilshire REIT ETF (AMEX: RWR) has posted year-to-date gains of 1.27 percent. Other broad market real estate ETFs are posting similar performance gains, despite declines in global stock indexes.  

Most of the broad market REIT ETFs have exposure to all the important real estate segments including apartment, healthcare, office, retail, and industrial properties. Not included in REIT indexes are homebuilding stocks.

Among diversified REIT ETFs, the iShares Cohen & Steers Realty Majors (NYSEArca: ICF) is the most concentrated, with only 30 holdings. In contrast, the SPDR DJ Wilshire REIT ETF holds around 87 stocks and the Vanguard REIT ETF (NYSEArca: VNQ) has 98.

Both RWR and VNQ are excellent choices for investors wanting to obtain broad and low cost exposure to real estate.  

Barclays Global Investors (BGI) offers nine ETFs that focus on niche NAREIT real estate segments. Among the best performers in this small group is the iShares FTSE NAREIT Residential Real Estate (NYSEArca: REZ) which is ahead by 16.72 percent. Top holdings are mainly concentrated in apartment REITs and include Apartment Investment & Management, Avalonbay Communities, and Camden Properties.

The worst performing REIT segment is the iShares NAREIT Mortgage REITS (NYSEArca: REM). The ETF is down by 29.29 percent this year and has been at the epicenter of the nationwide U.S. housing bust.

Another area many investors fail to include in their portfolio exposure is international real estate. The SPDR DJ Wilshire Real Estate ETF (AMEX: RWX) contains exposure to top worldwide real estate markets including Australia, France, Japan and the United Kingdom. The fund is off by 25.64 percent this year.  

REITs can play an important role in stabilizing and diversifying an investment portfolio in any kind of market.

According to ETFguide.com's database, the annual investment costs for U.S. REIT ETFs range from 0.12 to 0.39 percent which is substantially lower compared to actively managed real estate mutual funds.

*Performance through 8/31/08