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Portfolio > Alternative Investments > Real Estate

Safe Haven: U.S. REITs

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With major global stock markets on sputter mode, real estate investment trusts (REITs) are proving to be a haven. Through mid-April, the DJ Wilshire REIT ETF (RWR) has posted year-to-date gains of 7.9 percent and other real estate ETFs are experiencing similar strong performance.

According to the National Association of Real Estate Investment Trusts (NAREIT), an industry trade group based in Washington D.C., its composite equity REIT index has enjoyed compounding returns of 10.22 percent over the past 10 years, as of February 29, 2008. That includes a string of seven consecutive years of positive performance. Over the same time period, the S&P 500 posted average gains of 4.07 percent.

Highly regarded individuals in the investment community like David Swensen continue to advocate REITs too. He recommends a 20 percent allocation to REITs in a diversified investment portfolio. Swenson manages Yale University’s endowment which recorded a 28 percent gain last year.

Most of the broad market REIT ETFs have exposure to all the important real estate segments including apartment, healthcare, office, retail, and industrial properties. Not included in REIT indexes are homebuilding stocks.

Among diversified REIT ETFs, the iShares Cohen & Steers Realty Majors (ICF) is the most concentrated, with only 30 holdings. In contrast, the DJ Wilshire REIT ETF has held 87 stocks, and the Vanguard REIT ETF (VNQ) 98. Anyone of these funds are excellent core REIT holdings.

Barclays Global offers nine ETFs that focus on niche NAREIT real estate segments. The best performing fund this year in that small group is the iShares FTSE NAREIT Residential Real Estate (REZ), which is ahead by 14 percent. Top holdings are mainly concentrated in apartment REITs and include Apartment Investment & Management, Avalonbay Communities and Camden Properties.

The worst performing REIT segment is the iShares NAREIT Mortgage REITS (REM). The sector is down by 17.4 percent this year and has been at the epicenter of the nationwide U.S. housing bust. International real estate (RWX) is off by 4 percent and is another lackluster performing area so far this year.

Expense ratios for REIT ETFs range between 0.12 to 0.35 percent, with the Vanguard REIT fund having the lowest.


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