Real estate’s really been an amazing story in 2010. The sector has been both volatile and profitable in the face of massive legislative overhauls, credit and liquidity crises, stubborn unemployment numbers, record low mortgage rates and a housing glut. Bond King Bill Gross recently declared that real estate would beat stocks and bonds and Real Estate Investment Trusts (REITs) offer one of the best ways for retail investors to play in this space with a low barrier to entry. While there are some tangential sectors related to the REIT rally like financials, builders and regional banks, none of them offer the combined capital appreciation and steady dividend payouts we’ve been seeing from the genre.
Impressive REIT Performance YTD
All of the key real estate ETFs are handily beating the S&P500 for the year, which is marginally up 0.7% on the year. Meanwhile, the top REIT ETFs are up 15-17% YTD. The rally has been attributed to various factors including the continued need for Americans to rent during the housing drawdown, coupled with a modest economic recovery. While individual REIT issues certainly allow for higher yields (see complete REIT List of dozens of publicly traded outfits) if investors are willing to take on company risk, the beauty of these ETFs is a diverse array of regions, type of real estate and companies all at a reasonable expense ratio.
- SPDR Dow Jones REIT ETF (RWR) is up 17%, with a yield of 3.1% and an expense ratio of 0.25%.
- Vanguard REIT ETF (VNQ) is up 17%, with a yield of 2.7% and an expense ratio of 0.13%.
- iShares Dow Jones U.S. Real Estate Index Fund (IYR) is up 15%, with a yield of 4.4% and an expense ratio of 0.48%.
Risks to REIT Dominance
While the REITs have had a great run, there are some factors to monitor as the year progresses. At some point, interest rates are going to have to rise, which will put pressure on housing. Additionally, if credit tightens up again or defaults spike, investors could start fleeing. It remains to be seen what’s going to happen in 2011 with the Bush Tax Cuts expiring as well.
Disclosure: No position in any ETFs reviewed in this article.