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The REIT ETFs You Should Buy Right Now

Not every ETF in this income-focused asset class is flush with yield

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It might seem like madness to suggest buying real estate investment trusts at a time when yields are soaring and anything associated with “income investing” is getting slammed. But with many popular REITs down 30% or more, now is precisely the time to start digging around for value.

This bond market selloff could very well continue for a while, so I don’t recommend trying to catch the proverbial falling knife by calling an exact bottom in REIT shares. But at the very least, you should build a watch list of your favorite names and average into them on any weakness.

But what about REIT funds?

Traditional REITs

Given the popularity of REITs, a plethora of exchange-traded funds have sprung up, each offering a slightly different approach to the asset class. While I prefer to cherry-pick a portfolio of my favorite REITs, a REIT ETF may be a great option for a smaller accounts or investors who prefer a “one stop shop” approach.

I’ll go through several familiar (and probably not so familiar) names today. Let’s start with the biggest and most popular ETFs in the segment, which hold the largest-cap equity REITs. In this space, we have …

REIT ETF Ticker DIV. Yield AUM Expenses
Vanguard REIT VNQ 3.37% $34.68B 0.10%
SPDR Dow Jones REIT RWR 2.84% $2.13B 0.25%
iShares Cohen & Steers Realty Majors ICF 2.86% $2.87B 0.35%
iShares Dow Jones U.S. Real Estate IYR 3.52% $5.78B 0.47%

What is immediately striking about this group is the pitifully low yields on iShares’ RWR and ICF. For an asset class that is ostensibly income-focused, that simply is not enough income to warrant serious consideration.

Each of these ETFs uses a slightly different index to track the sector, but their top 10 holdings are nearly identical. Simon Property Group (SPG) is the single-largest holding in all four ETFs, and HCP (HCP), Public Storage (PSA), Vornado (VNO) and Equity Residential (EQR) feature prominently as well.

While there is nothing “wrong” with these large-cap REITs, some have yields that are a little less than impressive for securities that were desgined to be income vehicles. Simon Property Group, the largest holding in all four ETFs, yields only 2.9%.

Some of these REITs — and Vornado has been a high-profile case of this in recent years — have evolved away from pure landlording and have moved to become “dealmaking” growth vehicles in which property speculation is as important (or more so) than collecting rent checks. Again, there is nothing inherently “wrong” with this, but it might not be what you are looking for if you consider yourself an income investor.


Not surprisingly, since all four large-cap REIT funds hold substantially the same securities, they tend to track each other pretty closely. Given that these are index investments with no active management in place, the smartest course of action is to buy the ETF with the highest yield and lowest management fee. This leaves us with the Vanguard REIT ETF (VNQ) and the iShares Dow Jones US Real Estate (IYR).

IYR has a slightly higher current yield (15 basis points), but its management fee is 37 basis points higher.

Normally, I would call that close enough to be a wash. But the Vanguard ETF is a purer play on actual property-owning equity REITs, whereas the iShares fund has exposure to mortgage REITs and to non-REIT development and holding companies such as Alexander and Baldwin (ALEX), which, among other things, produces sugar and coffee on Hawaiian plantations.

So for broad large-cap REIT exposure in long-term accounts, go with Vanguard’s VNQ.

Now, a look at “specialty” REITs …

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