Other Ways To Access Real Estate
Those who aren’t satisfied with these choices can choose alternative ways of benefiting from the recovering housing market, such as investing in funds that track homebuilders.
Homebuilders funds such as the iShares Dow Jones U.S. Home Construction (NYSEArca: ITB) and the SPDR S&P Homebuilders ETF (NYSEArca: XHB) have been doing particularly well recently. ITB is the top-returning ETF of 2012 so far, returning 58.57 percent, with XHB at 43.66 percent.
To put those figures into perspective, the two funds are outperforming the SPDR S&P 500 ETF (NYSEArca: SPY) by 42 percentage points and 28 percentage points, respectively.
Both ETFs reach beyond the narrow definition of homebuilders. Although ITB’s portfolio remains anchored in homebuilders, at 68 percent of total holdings, it expands into home furnishings as well as home-improvement retailers—subindustries that will surely benefit from a recovering housing market.
XHB is an equal-weighted option that invests less than 30 percent in homebuilders. The fund instead focuses on companies that specialize in appliances and housewares, holding well-known retail names such as Pier 1 Imports and Williams Sonoma.
Both ETFs hold Toll Brothers and NVR, two of the five companies that Forbes targeted as promising in a real estate rebound.
A third option exists for those who are still looking: mortgage REITs, broadly defined as companies that invest and own property mortgages. The three options available to U.S. investors are the SPDR S&P Mortgage Finance ETF (NYSEArca: KME), the Market Vectors Mortgage REIT Income ETF (NYSEArca: MORT) and the iShares FTSE NAREIT Mortgage Plus Capped Index Fund (NYSEArca: REM).
REM invests in U.S. residential and commercial mortgage REITs, while MORT invests in U.S. and non-U.S. companies that derive at least 50 percent of their revenues from mortgage-related activities. That gives it wiggle room to venture outside the mortgage REIT space.
Despite their differences in methodology, MORT’s and REM’s portfolios are similar in size and type: Both hold 25-30 stocks and invest over 30 percent of assets in Annaly Capital Management and American Capital Agency.
Compared with MORT and REM, State Street’s KME looks like an oddball. According to its fact sheet, the underlying index includes “pure mortgage players, mortgage insurers, and banks and thrifts that have considerable mortgage loan portfolios in the United States.”
That said, the fund has only 22 percent of its assets invested in mortgage REITs, while the rest of its portfolio is composed of property and casualty insurance firms, homebuilders and regional banks.
There are a lot of choices available to ETF investors so, as always, doing the homework to help determine what best fits your needs is crucial.
At the time the article was written, the author held a position in ITB. Contact Ana Kostioukova at [email protected]. Follow Ana on Twitter @AnaKostioukova.