The Fed’s taper talk is really throwing investors for a loop — especially those looking for income. With the potential of rising interest rates on the table, investors have shunned a variety of high-dividend-paying sectors and shares. Asset classes like long-term bonds and master limited partnerships (MLPs) have all plunged in wake of the Fed’s news that it could begin slowing down its bond buying programs sooner than later.
However, while selling 30-year bonds makes some sense, it seems that investors are selling anything that throws off a yield indiscriminately. That’s leading to some pretty big opportunities for investors to look beyond all the taper tantrum talk.
One such opportunity lies within dividend-paying shares of real estate investment trusts (REITs).
Like much of the high-yield universe, REITs have been sold down. Yet, owners of shopping plazas, office buildings and hospitals have historically performed quite well in rising interest rate environments. According to research at Invesco (IVZ), there have been 12 sustained periods of time when the 10-year treasury yield rose 75 basis points or more since 1994. REITs have performed wonderfully during this time, and have risen 14% on average. That beats the 7.7% returns of the S&P 500 during the same time period.
All in all, REITs have what it takes to face the Fed head-on and win. Here are five quick and easy ways to giant more exposure to the asset class courtesy of exchange-traded funds (ETFs).
Vanguard REIT Index ETF (VNQ)
When it comes to low cost, there is no denying that the Vanguard’s wizards in Malvern are the leaders. And the commercial real estate sector is no exception. The Vanguard REIT Index ETF (VNQ) charges just 0.10% — or $10 per $10,000 invested — in expenses.
But the VNQ is also a heck of a fund.
The REIT ETF tracks 126 of America’s largest REITs across various property sub-types. Top holdings include apartment operator Avalonbay Communities (AVB) and hospital/medical property owner Ventas (VTR). However, the fund focuses strictly on “equity” REITs — meaning actual property owners. There are no mortgage REIT holdings in the fund. That provides investors with pure exposure to physical commercial real estate.
Investors seem to like that fact, as VNQ is one of the most heavily traded ETFs on the planet and has more than $18 billion in assets. Returns have been pretty swift as well: VNQ has managed to produce a 8.3% annual return since it first started trading in 1996.
Not to mention it kicks off a 3.77% dividend yield.
iShares Cohen & Steers REIT (ICF)
Sometimes bigger is better.
During the Great Recession, the largest REITs in the country were able to use their size to their advantage in order to raise capital and buy up distressed properties and rivals on the cheap. That trend continues today as some of the biggest REITs continue to make strong accreditive deals.
Which is why the iShares Cohen & Steers REIT (ICF) could be a good option for investors looking to add real estate exposure.
ICF focuses its attention on the biggest of the big at just 31 different REIT stocks. Exactly how big are we talking? Top holding and mall operator Simon (SPG) owns nearly 325 shopping malls — or 242 million square feet of retail space — and has a market cap of $46 billion. Running a more concentrated portfolio and focusing on size/quality has produced some pretty nice returns for ICF.
Since 2001, the ETF has managed to 9.98% annual return, and ICF currently yields 3.4%. Expenses run 0.35% per year.
PowerShares KBW Premium Yield Equity REIT (IRC)
If ICF is a play on the titans of real estate, then the PowerShares KBW Premium Yield Equity REIT (KBWY) is a bet on the small fries. The ETF tracks 33 mid and small-cap equity REITS.
However, small does have its advantages — namely bigger dividend yields.
As investors flock to the big boys for their safety, smaller REITs have historically yielded much, much more. For example, $1 billion market capped Inland Real Estate (IRC) yields around 5.4% (versus Simon’s 3.2%).
As a bonus, KBWY weights its holdings based on highest dividend yields. That fact produces a 5.53% overall yield on KBWY shares. Meanwhile, KBWY has managed to produce a 10% return since the beginning of the year — more than VNQ and ICF.
Expenses run 0.35%.
SPDR Dow Jones International Real Estate (RWX)
The United States isn’t the only place for investors to find real estate gold. In fact, the U.S. only represents about 30% of the total global real estate market.
That leaves plenty of room for U.S. investors to capitalize on the opportunities in the international space. And those opportunities are growing. Since the mid-90s, nearly 30 different countries have adopted the REIT tax structure — everyone from Singapore to France.
The SPDR Dow Jones International Real Estate (RWX) bets on those international property firms.
RWX tracks 135 different international REITs, real estate owners and operating firms — with Japan, Australia and the United Kingdom as the largest country weightings. Top holdings include some of the “who’s who” in international property owners. And aside from the diversification benefits of going global, investors are treated to another benefit — a higher dividend yield.
RWX is currently yielding roughly double the VNQ and ICF at 6.4%. Meanwhile, expenses are relatively cheap at 0.59%.
Market Vectors Mortgage REIT ETF (MORT)
There’s more than one way to skin a cat, and that holds true in the real estate sector as well. While most everyone is familiar with the owners of physical property, there is another type of REIT — mortgage owners. These companies will loan money to owners of real estate or purchase existing mortgages and mortgage-backed securities (MBS).
Many of these companies have been able to borrow at near-zero interest rates and use that leverage to purchase more mortgage-backed securities. These securities can be insured by federal agencies — like Ginnie Mae — or those without agency insurance (non-agency).
The result is dividend yields well north of 9%.
Offering a 10.95% yield is the Market Vectors Mortgage REIT ETF (MORT). The ETF bets on a basket of 26 of these different mREITS and has been severely punished since the Fed began its taper talk. MORT isn’t without risk, but it the Fed continues to hold back its taper, the ETF should continue to churn out heavy distributions to shareholders.
Expenses for MORT run 0.58%.
As of this writing, Aaron Levitt was long VNQ.