Following its separation from the financial services sector, the real estate group is the newest sector in the S&P 500. It is also one of the smallest. With a weight of just under 3%, real estate outpaces only materials and telecom in the benchmark U.S. equity index.
Despite that diminutive status, real estate stocks and real estate investment trusts (REITs) are well-represented in the world of exchange traded funds (ETFs). There are nearly 25 REIT ETFs available in the U.S.
Underscoring investors’ needs for income-generating assets, some REIT ETFs are extremeley popular. For example, the Vanguard REIT Index Fund (NYSEARCA:VNQ) is not just the largest REIT ETF, but with almost $35 billion in assets under management, it is the largest sector ETF of any type.
Investors have flocked to REIT ETFs in recent years as U.S. interest rates have remained low and other major developed markets have started sporting negative sovereign debt yields. To be classified as a REIT and earn the corresponding tax benefits, these companies must pay at least 90% of earnings to shareholders in the form of dividends.
While REITs are a favored destination for many income investors, the asset class carries with a familiar risk seen with other high-yielding groups: Interest rate risk.
The good news is that on a historical basis, REIT interest rate risk is not as severe as other sectors such as utilities, so income-starved investors can still consider the following REIT ETFs.