REIT ETFs Take Different Paths In '08

September 15, 2008

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.


Even with the recent slide, all of the six broad-based domestic REIT index ETFs are up year-to-date.



YTD (%)

12 Mos. (%)

2007 (%)

3 Mos. (%)

Vanguard REIT Index










iShares C&S Realty





First Trust S&P REIT





iShares FTSE EPRA/NAREIT North America





iShares DJ Real Estate







All the broad-based domestic REIT funds have holdings ranging from 80-120 REIT stocks, with the exception of the iShares Cohen & Steers Realty Majors Index ETF (NYSEArca: ICF), which holds 31 REIT stocks. While it is much more concentrated, its top 10 holdings are spread across all the major REIT sectors, and its performance year-to-date is No. 1 versus its ETF peers.

However, as one might expect, the major distinction between the Vanguard REIT ETF and iShares C&S REIT ETF, other than in holdings, is the expense ratio: 12 basis points versus 35 basis points. In fact, the Vanguard REIT ETF has a much lower expense ratio than all the broad-based REIT ETFs.




Exp. Ratio

Net Assets (In Bill.)



Vanguard REIT Index










iShares C&S Realty





First Trust S&P REIT





iShares FTSE EPRA/NAREIT North America





iShares DJ Real Estate







The Vanguard and iShares Cohen & Steers fund share nine of 10 REIT stocks among their top 10 holdings.

The iShares FTSE EPRA/NAREIT North America and SPDR DJ Wilshire have the exact same top 10 holdings as the Vanguard fund.

Only the iShares DJ Real Estate ETF has two top 10 holdings not represented in any of the other REIT funds through July 12: REIT Plum Creek Timber, and Annaly Capital Management, a mortgage-backed securities investment REIT. 

Annaly has rebounded from a low point in its value earlier in the year, but the iShares DJ Real Estate Fund is the only with a mortgage-based REIT in its top 10 holdings, and has been the second-worst-performing fund, year-to-date. Plum Creek Timber is also among the top 10 holdings in the First Trust S&P REIT ETF. It should also be noted that the iShares FTSE/NAREIT North America ETF includes exposure to Canadian REITs, but not among its top 10 holdings, and overall, the fund is 91% in U.S.-based REITs.

The message from the advisory community is clearly on the side of Vanguard and the broad-based REIT ETFs. "Don't try to be a hero," Gordon cautioned investors. An investor can find plenty of individual REIT stocks that have been on a tear, also, from medical office buildings to long-term care, but in the area of index-based REIT ETFs, this is not the time to be betting on the most risky.

Of course, for the risk-taking investor, there are many other ways to play. Barclays Global Investors also offers REIT subsector index ETFs, the iShares FTSE/NAREIT Industrial/Office (NYSEArca: FIO) and the iShares FTSE NAREIT Retail (NYSEArca: RTL). The retail REIT ETF is up 0.64% for the year, while the office/industrial REIT is down 3.17%.

And for those with a really strong stomach, there is a growing array of international and global REIT ETFs currently being pummeled by the markets, down between 16% to 44% this year, with the worst performance turned in by the Claymore/AlphaShares China Real Estate ETF (NYSEArca: TAO).

And there is always the iShares FTSE NAREIT Mortgage ETF (NYSEArca: REM), which is not surprisingly this year's worst performer, down 29.49%.

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