Equity: U.S. Real Estate
US real estate is a big draw in the ETF world: The segment hosts over $30B in assets. All the biggest fund issuers - and some of the smaller ones - have gotten in on the act, which makes
“SCHH and RWR track the same Dow Jones index” for some interesting, and occasionally redundant, competition. The funds tend to fall into two main categories: traditional cap-weighted funds that offer access to a broad basket of REITs; and alternative funds with niche exposure to small caps, REIT sub-sectors and yield plays.
Many ETFs offer a more or less standard cap-weighted approach to the market, which can make it hard for any one fund to stand out in the crowd. Our Analyst Pick for the segment, VNQ, boasts deep liquidity, tracks an excellent index (and does it exceptionally well) and charges a very competitive expense ratio. The market has put its weight behind it, too: it leads the segment in AUM by far. SCHH has put up a strong challenging bid to VNQ with a tiny fee, a growing asset base and solid exposure. SCHH also challenges RWR head-to-head: Both funds track the same Dow Jones index. There are other strong competitors though. First Trust’s FRI tracks the most diversified real estate index and iShares’ IYR dominates in trading volume.
Among the alternative funds, there are some interesting strategies at play: iShares offered 3 funds that target real estate subsectors, but investor interest is uneven. Only REZ has a strong asset base. KBWY weights its stocks by dividend yield; ROOF holds just small-cap REITs; and PowerShares’ PSR eschews index tracking in favor of actively managing its holdings. These funds offer alternatives for investors with nuanced views on where real estate is headed, but generally don’t match the size and liquidity of the vanilla offerings. (Insight updated 03/24/17)
All Funds (18)
IYR $4.49 B 4492333440 Liquid but expensive to hold
FREL $233.48 M 233482720 N/A
VNQ $34.04 B 34038578346.09 Liquid and cheap to hold
FRI $228.35 M 228350045.67 stable but not cheap to hold
RWR $3.12 B 3123348553.6518 Liquid
SCHH $2.95 B 2947234260 very low holding cost
ICF $3.29 B 3289367350 large and liquid
REZ $379.59 M 379586400 decent AUM and liquidity
KBWY $265.53 M 265526100 Dividend-focused
USRT $87.53 M 87526800 low fee
PSR $26.57 M 26568500 Dear to hold; hard to trade
WREI $23.13 M 23132500 low AUM; low trade volume
ROOF $99.8 M 99799400 pricey
RORE $4.45 M 4451190 N/A
EWRE $27.98 M 27982500 new; trade with care
NURE $6.33 M 6330450 N/A
XLRE $2.32 B 2319961364.5 new, trade with care
FTY $67.13 M 67131400 not cheap
ETF.com Grade as 03/16/17
Equity: U.S. Real Estate
ETF.com Efficiency Insight
Differences in fees set funds apart in US real estate, as does closure risk from low assets.
The segment offers several extremely low-priced funds: Charles Schwab’s SCHH
“SCHH does a great job delivering its index with minimal costs and risks” leads the pack with a segment low expense ratio. VNQ is also well-priced and RWR is also reasonable. These funds track their indexes well, with typical holding costs that are in line with their fees.
After that, things get a bit pricier. The iShares funds in the segment charge a bit more, leaving them much less competitive on price. Alternative funds (with the exception of KBWY) charge the highest fees, topped by PSR, though they hope to lure investors through their investment strategies, not on price alone. Tracking error tends to be less of an issue in this segment, as many of the funds hew tightly to their indexes, which is a plus to investors. All of the top-scoring funds (RWR, SCHH, and especially VNQ) track their indexes extremely well, but some funds, ROOF for instance, have wobbly tracking that makes costs of ownership harder to forecast.
There’s more concern regarding fund-closure risk, leaving WREI with high closure risk.
Still, the segment contains many funds, led by SCHH, which do a great job delivering their index with minimal costs and risks. (Insight updated 03/24/17)
ETF.com Tradability Insight
US real estate has the incredibly dynamic range of liquidity that’s quite common in the ETF world. Funds range from incredibly liquid to barely trading.
Liquidity giants IYR
“Funds range from incredibly liquid to barely trading.” and VNQ fall squarely in the first camp. The 2 funds trade hundreds of millions of dollars daily at extremely tight spreads. Volume like this is a boon to traders of all sizes from the fast money crowd to do-it-yourselfers.
A solid middle tier of funds also offers ample liquidity for most investors even though they’re not in the league of IYR and VNQ. These include ICF, RWR, SCHH and FRI, each of which trades well each day at reasonable spreads.
FNIO and WREI land at the bottom of the liquidity spectrum. Use care and skill to trade these funds as volume is quite thin. Some of these funds have decent spreads, but bear in mind that these are average inside quoted spreads, so larger market orders could sweep through the thin order book resulting in expensive execution. Use limit orders to stave off this outcome.
For larger investors, block liquidity is generally good, and it's evenly distributed across the range of funds. Creation costs are modest and underlying liquidity ranges from good to fair, with KBWY as the outlier. KBWY's concentrated stake in small- and microcap names gives it a large footprint in underlying markets, so price impact is a concern for creates/redeems. For funds like IYR and VNQ, underlying liquidity is a non-issue given their truly massive on-screen volume. (Insight updated 03/24/17)
ETF.com Fit Insight
Investors have their pick of funds tracking well-designed indexes that largely capture the market return and exposure of US real estate. They also can select from funds that take an
“The mainstream funds here generally capture the real estate market for what it is” alternate or narrower view of the space.
The mainstream funds here generally capture the real estate market for what it is: a short list of big names (Simon Property Group, American Tower, Public Storage) with dominant market caps, and a large concentration in commercial and residential REITs (a combined 55% of the market roughly) and specialized REITs which include REITs related to anything from hospitals and hotels to railways.
Vanguard’s VNQ tracks the comprehensive MSCI US REIT Index and earns a very high score, but IYR edges it on better balance across the REIT sub-sectors. First Trust’s FRI offers the most diversified portfolio in US real estate, while large-cap-oriented FTY also scores delivers excellent coverage with far fewer names. RWR and SCHH, which both track the Dow Jones U.S. Select REIT Index, earn solid scores as well.
The alternative funds generally don’t capture the market return, nor do they aim to. A low Fit score merely indicates the degree to which they vary from our benchmark in exposure and performance. PowerShares’ KBWY shoots for yield and tilts very, very small along the way, with a large chunk of assets devoted to small- and microcaps. ROOF skews even smaller than KBWY, but it does so with clear purpose. Both funds have high yielding portfolios at present, but their small-cap bias has amped up volatility too.
Other ETFs depart from broad market exposure by parsing the sub-sectors of US real estate—with mixed results. iShares’ REZ, ostensibly a residential real estate fund, suffers for its unexpected sector tilts: The fund has larger portion of assets allocated to specialized REITs than residential REITs. It’s really an ex-commercial REIT play.
Probably the biggest surprise here is that the actively managed fund PSR fits the market quite well, on par with vanilla index-tracking funds. That leaves big questions about what exactly PSR is buying you. The caveat: As an actively managed fund, PSR’s fit to the market could change overnight. (Insight updated 03/24/17)