How Active & Passive REIT ETFs Differ

REITs are a hot investment this year, thanks in part to their strong performance and solid dividend yields. These traits are appealing in an environment where investors are faced with low rates and dropping bond yields everywhere else.

The ETF market has several REIT-focused ETFs that investors can choose from, but so far this year, there are two funds that stand out for different reasons.

The first is an actively managed PowerShares ETF, the PowerShares Active US Real Estate Fund (PSR | C-91). The second is a passive strategy, the Vanguard REIT Fund (VNQ | A-91).

PSR is one of the best-performing actively managed ETFs so far this year, clocking in at No. 11, with gains upward of 10%. Its performance is making it stand apart among other active funds.

VNQ, meanwhile, is earning a different distinction this year—one of popularity. The largest REIT fund in the market today is also one of 2016’s 10 most popular ETFs, seeing net creations of $3.6 billion year-to-date.

You could say that VNQ competes with PSR in a passive versus active battle for the best returns in class. Here’s how their year-to-date performance stacks up: 

Chart courtesy of StockCharts.com

If this were a performance showdown, PSR may be among the best active funds of the year, but it’s still lagging the passive VNQ by nearly 3 percentage points.

Trading Spreads Matter

That underperformance might not matter much to investors who prefer PSR’s hands-on active approach to investing in REITs, except for the fact that PSR carries a 0.80% expense ratio, and trades with an average spread of 0.23%. That means investors are shelling out an average of 1.03% to own and trade this fund.

By comparison, VNQ comes with a 0.12% expense ratio and trades with an average spread of 0.01%—that’s about 0.13% in all-in costs, according to FactSet data. It amounts to about $13 per $10,000 invested versus PSR’s $103 per $10,000. That’s a sizable difference.

There are other portfolio differences to take into account. The first one is liquidity—going back to those trading spreads.

PSR has $28 million in assets, and trades on average $75,000 a day with an average spread, as mentioned, of 0.23%.

VNQ has $34.5 billion in total assets, and averages $325 million in daily volume at penny spreads. It’s large and it’s liquid in a way PSR can’t match.

Different Underlying Holdings

Perhaps the appeal of PSR is that it offers an alternative to plain-vanilla REIT exposure for investors who may have specific views on this segment. The fund owns 50 securities that are re-evaluated monthly, and selected through “quantitative and statistical metrics to identify attractively priced securities and manage risk,” according to PowerShares.

The active approach to investing in REITs has also led to higher turnover among portfolio holdings. The underperformance relative to VNQ might suggest some of the bets PSR has made in the first half of this year haven’t all paid off.

VNQ is a vanilla, broad basket of REITs three times as big, with 149 holdings.

There are also differences in focus. VNQ is heavily tilted toward commercial REITs—more than 50% of the portfolio—while PSR has specialized REITs as its top holding. Retail and office REITs represent a combined 37% of the portfolio. Both funds have similar allocations to residential REITs.

These differences in exposure and approach drive the funds’ difference in performance, and impact their overall payout to investors over time.

Different Ways Yield Is Reported

PSR is currently shelling out a 30-day yield of 2.68%. This is a figure that shows the yield performance over the most recent past 30 days, and it’s a pretty standard metric of investor experience in the fund. VNQ, unfortunately, doesn’t publish a 30-day yield figure.

Vanguard instead reports an unadjusted effective yield, which sat at 3.77% as of the end of May. VNQ pays quarterly distributions comprising dividend income, return of capital and capital gains—all of which comprise the effective REIT distributions reported in that effective yield figure.

The bottom line is that there is no right or wrong choice for an investor looking to pick either of these REIT ETFs, but there are clearly differences that shouldn’t be overlooked in an effort to meet whatever ultimate investment goal you may have.

Low Rates Supportive Of REITs

From a broad perspective, the ongoing recovery in the U.S. housing market in an environment of continued low rates should bode well for the segment.

REITs may also garner increased attention—and find additional investor demand—as major index providers such as MSCI and S&P Dow Jones prepare to break out real estate into its own sector later this summer.

Until now, real estate and REITs have been a part of the financial sector under the Global Industry Classification Standard, but come late August, they will be a sector of their own, and that could spur some new demand, some say.

Contact Cinthia Murphy at [email protected].