Best Performing Real Estate ETFs
Real estate quietly creeps up to become the second-best-performing sector of the year.
Most investors are aware that technology is the top-performing sector this year, but they might be surprised to learn which sector is at No. 2.
The unassuming real estate sector has quietly racked up a 29.2% gain this year, just behind tech’s 31.6% return and well ahead of the S&P 500’s 20.5% rally.
Real estate has gotten a boost thanks to this year’s tumble in interest rates, which makes the sector’s yields attractive by comparison. The Vanguard Real Estate ETF (VNQ), the largest ETF in the space, currently sports a distribution yield of 3.8%, much greater than the S&P 500 dividend yield of 1.8% or the 10-year Treasury yield of 1.65%.
Low Rates Help Real Estate
In addition to making real estate stocks more attractive, lower interest rates also make the underlying real estate businesses more attractive.
Lower rates make financing less expensive for real estate investment trusts (REITs), which typically own, operate and lease real estate properties.
REITs make up about 98% of the real estate sector. Ironically, shares of homebuilders and home improvement companies aren’t included in the real estate sector as defined by the Global Industry Classification Standard; they are in consumer discretionary.
But they are still obviously real estate related, and have benefited from the lower rate environment, which boosts the demand for housing.
Homebuilders Outperforming
Homebuilder ETFs are among the top-performing real estate ETFs of the year. The iShares U.S. Home Construction ETF (ITB) and the SPDR S&P Homebuilders ETF (XHB) are each up more than 32% year to date.
ITB and XHB are the two largest homebuilder ETFs, with assets under management of $1 billion and $606 million, respectively. However, they have two very different weighting schemes—market cap weighting for ITB and equal weighting for XHB.
Moreover, ITB is much more heavily weighed toward traditional homebuilders like D.R. Horton and Lennar; while XHB has a more dispersed portfolio of homebuilders, building products companies, home improvement retailers and household appliance manufacturers.
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
Where The Money Is
Homebuilder ETFs have done well and have managed to keep up with REITs this year, but they aren’t where the money is. The amount of money invested in REIT ETFs is multiples of that invested in homebuilder ETFs.
The aforementioned VNQ has a whopping $36.3 billion in assets under management and is up a solid 26.8% this year. The fund has an expense ratio of 0.12% and provides broad, market-cap-weighted exposure to the real estate sector, primarily REITs. For a no-fuss, cheap fund that targets real estate, it’s hard to go wrong with VNQ.
That said, VNQ is just one of many broad real estate ETFs on the market, all of which have returned similar amounts this year.
The Real Estate Select Sector SPDR Fund (XLRE) targets REITs within the S&P 500; the Fidelity MSCI Real Estate Index ETF (FREL) targets REITs across the market-cap spectrum; the iShares Cohen & Steers REIT ETF (ICF) tracks and index of 30 large cap REITs selected by committee; the Invesco Active U.S. Real Estate ETF (PSR) uses active management to pick and choose its REIT holdings; and the Schwab U.S. REIT ETF (SCHH) offers the lowest expense ratio of all real estate ETFs—0.07%.
That’s just a sampling of the broad REIT ETFs out there; there are plenty more listed on the ETF.com real estate channel.
Data measures total returns through Sept. 9
More Focused REIT ETFs
In addition to those broad ETFs, investors can choose from more targeted real estate funds.
The Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF (SRVR) and the Pacer Benchmark Industrial Real Estate SCTR ETF (INDS) are two of those, with strong year-to-date returns: more than 36% a piece.
SRVR and INDS hold only a subset of the REIT market. In SRVR’s case, it is REITs that generate the majority of their revenue from real estate operations tied to the data and infrastructure space, such as data centers and communication towers.
Meanwhile, INDS focuses on industrial REITs, such as those that own warehouses, distribution centers and self-storage facilities.
Other Options
SRVR and INDS are two of the best-performing real estate ETFs this year, but they aren’t the only funds to focus on REIT subsectors. The Nuveen Short-Term REIT ETF (NURE), the Long-Term Care ETF (OLD) and the iShares Residential Real Estate ETF (REZ) up anywhere from 24% to 29% this year.
NURE targets REITs with short-term lease agreements, including those that hold apartment buildings, hostels and storage facilities; OLD holds REITs focused on senior housing; and REZ overweights residential REITs.
Those are just a handful of the niche REIT ETFs available. Others, including those that hold international REITs, small cap REITs and high dividend REITs can be found on the ETF.com real estate channel.
Email Sumit Roy at [email protected] or follow him on Twitter sumitroy2
