Investors beware: REIT funds sport varying characteristics that make each handle market's storm quite uniquely.
A dismal 2007 and the ongoing debacle in the U.S. housing market may lead investors to be skeptical about real estate in general. But domestic REIT exchange-traded funds have put together a decent 2008, even if you still can't sell your home, and your equity line of credit is now worth about as much as Lehman Brothers stock.
Several domestic REIT ETFs, from the broadest to the most niche-minded, are back in positive territory year-to-date. And that's even taking into account recent losses due to the financial sector's instability.
The biggest winner by far among REIT ETFs in 2008 has been the iShares FTSE NAREIT Residential ETF (NYSEArca: REZ), up 12.76% so far this year. The Vanguard Total Stock Market ETF (AMEX: VTI), by comparison, is down close to 11.4%.
But there's an important caveat here. The iShares fund is about as risky as it gets in the REIT ETF sector, with 21 holdings, and a focus only on the residential sector. Some 24.13% is held in Equity Residential, a firm whose portfolio is dominated by apartment properties. Since the apartment market poses a different dynamic than typical REITs that follow mortgage rates, its performance has been stellar so far. The ETF has returned better than 21% in 2008.
The other big bet is AvalonBay Communities, another major player in apartment REITs, which is up nearly 8.5% this year. It comprised nearly 15% of REZ.
But keep in mind that with so few stocks in its portfolio and the volatility of real estate markets in a slowing economy, the names of such big bets can change in rapid order.
Leader Of The Pack
Among the broad-based funds, the Vanguard REIT ETF (AMEX: VNQ), pegged to a Morgan Stanley REIT index, is the leader of the pack when returns are considered relative to expenses and volatility. It has returned 3.74% year-to-date. That's a far cry from the iShares NAREIT Residential ETF. But with 98 holdings spread across six REIT sectors, VNQ is also a much safer play for investors looking to capitalize on REIT exposure. And retail at 27% of total assets is the largest component of the Vanguard ETF. (Residential comes in fourth among all sectors behind office REITS and specialized REITS.)
Part of the performance trend can be tied to sector rotation taking place among investors. As noted by financial advisors, many of the worst-performing sectors from the summer of last year have recently exhibited performance strides, and even in negative territory, are besting the broad market.
The consumer sector was supposed to be dead, and yet the Consumer Discretionary SPDR (AMEX: XLY) and the SPDR S&P Retail (AMEX: XRT) are performing better than the market, points out Gary Gordon, president of Pacific Park Financial. "Housing is free-falling, and yet the SPDR S&P Homebuilders ETF (AMEX: XHB) and VNQ are up. For the most part, this is sector rotation," he said. "They've taken their lumps, and investors are bottom-fishing."
REITs as a sector are still closely linked to financial sector performance, and in spite of this year's success, can be moving up and down 3% on a daily basis. An example is early Monday after word broke over the weekend that Lehman Brothers was filing for bankruptcy. Both the highly diversified VNQ and concentrated REZ opened by tumbling more than 2% in early trading.
To that point, all of the broad-based REIT funds have given back some year-to-date gains in the past three-month period, through Sept. 12. The biggest three-month drop has been in the First Trust S&P REIT (AMEX: FRI), up 1.13% year-to-date, but down 1.12% in the past three months.
"My recommendation is don't try to find ‘the one,'" Gordon said. One or two focused REIT ETFs may have done better, "but the indexes have done shockingly well too, so just take the whole index and run with it, and don't have too big an allocation," he added.