Diversifying into real estate through REIT ETFs

ETFs

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I was reminded by that my investment portfolio lacked any exposure to the real estate market. We don’t even own a house, having decided the time is not yet right to buy into the Bay Area. So, earlier this week I decided to look into .

REITs invest money in companies that build and manage real estate properties and then receive returns in the form of rents and mortgages. By returning 90% of their taxable income to shareholders and meeting some other legal requirements (partially listed in the link above), REITs receive special tax treatment by the IRS. One convenient feature of REITs is that they trade on the stock market exchange, just like other stocks, so they can be one convenient way to diversify into real estate without actually owning your own physical property.

As usual, I decided to look for an ETF that fit my needs. (I’m rapidly becoming the Queen of ETFs among personal finance bloggers I think.) Among the US-based REIT ETFs offered are RWR (streetTRACKS DJ Wilshire REIT), VNQ (Vanguard REIT), ICF (iShares Cohen & Steers Realty Majors) and IYR (iShares Dow Jones US Real Estate). Despite tracking different indices, it turns out their top 10 holdings are nearly identical, though they appear in a slightly different order and with different weightings. Their expense ratios range from 0.12% (VNQ) to 0.6% (IYR).

Here’s a key fact: all four of these ETFs invest in equity REITs involved in the ownership and operation of commercial real estate. Specifically, the companies tracked by these ETFs are involved in building and managing retail, office, storage spaces, and apartments. Finding out about these ETFs’ holdings was particularly important to me, because I initially had no idea if they were exposed to the residential real estate market, an area I wanted to avoid for now because I don’t know where it’s headed.

In the end, I chose to buy some shares of ICF, the REIT ETF that tracks the Cohen & Steers Index. This index is comprised of large and liquid real estate companies that “may benefit from future consolidation and securitization of the US real estate industry” and while its expense ratio is on the high side of the group (0.48%), it has outperformed the other ETFs to more than make up for this amount. I have to suppose this has mostly been due to its greater concentration in a smaller number of assets (ICF has 31 holdings vs. 3 or more times that amount in the other ETFs). I plan on seeing how ICF performs, and if I decide to put more money into US REITs, my next purchase will probably be into VNQ.

If you’re interested in learning more about REIT ETFs, I recommend reading the VNQ prospectus, even if you end up purchasing another fund. Vanguard really does a fine job of thoroughly explaining their ETFs so that anyone can understand them. Businessweek also has a slightly older but useful mentioned above.

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14 Feedbacks on "Diversifying into real estate through REIT ETFs"

My 1st Million At 33 » Blog Archive » Carnival of Investing #46

[…] Ricemutt presents Diversifying into real estate through REIT ETFs. posted at Experiments in Finance. An introductory post about four REIT ETFs. […]



Top picks from Carnival of Investing #46: Learn something new | Experiments in Finance

[…] This week’s Carnival of Investing has been posted at My 1st Million at 33. I contributed last week’s post on REIT ETFs, but becoming an investor is nothing if not an ongoing learning activity, and the investment universe is impossible for one person to cover. So, why not see what others have to say? Below are some other posts that were contributed this week that taught me something I didn’t know: […]



George

Hi Ricemut,

I’m glad to hear that you are considering adding some REITs to your portfolio. I added HPT to my portfolio a few months after 9/11 (yielding over 11 percent at the time) and I have loved it since.

However, REITs are getting pretty pricey now that everyone else is discovering them. I highly recommend that you read Ralph Block’s post at the Motley Fool at http://www.fool.com/community/pod/2006/061017.htm. Ralph wrote the book on REIT investing and is a real expert on the subject.

I would avoid buying a REIT index at this time and instead focus on identifying opportunities in the REIT sector that provide a margin of safety. International REITs may be the way to go right now if you really want to add REITs to portfolio in the near future. In addition, buying individual REITs helps reduce your costs buy avoiding the slightly higher fees associated with REIT index funds. I would also focus on identifying REITs that control important, hard to substitute pieces of property. Even REITs can have wide moats.



Ricemutt

Thanks for your comment, George. I’ll definitely look into the post you provided. I’ve heard mention of international REITs being possible good buys but had assumed that I ought to start with the US and then learn more about that aspect of things before jumping in.

The main reason I keep this blog is to learn about investing (of all kinds) and toget ideas on what others might think I’m doing right or wrong, so I really appreciate the feedback!



Current Thoughts on REIT ETFs - Fat Pitch Financials

[…] I ran across an article today on real estate investment trust (REIT) ETFs at Experiments in Finance. Ricemut, the author, had done a good job exploring various REIT indices and electronically traded funds (ETFs) based on those indices.  She is considering increasing her portfolio diversity by adding a REIT ETF. […]



Send Money Online » Current Thoughts on REIT ETFs

[…] I ran across an article today on real estate investment trust (REIT) ETFs at Experiments in Finance. Ricemut, the author, had done a good job exploring various REIT indices and electronically traded funds (ETFs) based on those indices.  She is considering increasing her portfolio diversity by adding a REIT ETF. […]



All this industry consolidation’s great, but what’s next? | Experiments in Finance

[…] I woke up yesterday to discover that my recent purchase of ICF, a real estate REIT, had shot up by 4% due to Blackstone Group’s purchase of Equity Office Properties Trust (EOP) for $36B, including $15B in debt in the largest private-equity deal, ever. Since EOP is a major component of the 31 REITs that comprises ICF, it, along with most other REIT ETFs, went up thanks to the announcement of the deal. […]



Exited my position in ICF (REIT ETF) | Experiments in Finance

[…] I had originally wanted to invest in REITs in order to diversify my investments (as mentioned previosly, we don’t own any property at all) and thought that by investing in commercial real rather than residential estate and dollar-cost averaging into an index, I’d addressed the riskiest aspect of REIT investing. But shortly writing about my investment, I was advised in a comment in the same post by a reader and more experienced value investor that a REIT index might not be the best way to go at this time. […]



Keepin’ it real: real estate funds again, this time international | Experiments in Finance

[…] I’ve been interested in learning more about real estate funds and REITs ever since I made my purchase of the US-based REIT ICF some months ago and then divested of it after receiving advice from readers and realizing I was buying something I really didn’t understand. One reader more knowledgable than I recommended looking internationally instead. […]



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