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August 24, 2011 at 08:00 PM
Income-starved investors hunting for additional revenue streams pounced on real-estate-investment-trust-related exchange-traded funds this year.
With bond yields at historical lows, investors turned to investments that offered any form of decent yields. As such, REITs have attracted their fair share of market interest. Assets in the ETF category rose 60% for the past year. The asset class climbed nearly 200% since the March 2009 lows and gained more than two times the broader U.S. market.
How They Work
Companies generate revenue from rent collected on properties. REITs then pay out a hefty chunk of their net income to shareholders through dividends in order to qualify for federal tax breaks.
By pooling assets together, REITs reduce risk and provide greater diversification since capital is distributed through numerous properties. If an individual were to mimic such a strategy, one would have to buy multiple properties. Investments in REITs are also a more efficient diversifier because REITs are more liquid compared with investments tied to physical property.
The Caveat
The largest risk that REIT investors face is the ability of the companies to collect rent. If the commercial side of the market weakens, that could weaken the yields to the point that shareholders no longer find them of value. Additionally, GDP, job growth, corporate profits and consumer confidence are also major factors to consider when gauging economically sensitive REIT ETFs.
