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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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Specialty REITS

REIT ETF Ticker Div. Yield AUM Expenses
PowerShares KBW Prm. Yield Equity REIT KBWY 4.36% $71.8M 0.35%
IQ US Real Estate Small Cap ETF ROOF 4.48% $39.4M 0.69%
iShares FTSE NAREIT Residential REZ 2.96% $309.8M 0.48%
iShares FTSE NAREIT Retail RTL 2.95% $20.8M 0.48%
iShares FTSE NAREIT Industrial/Office FNIO 2.72% $12.5M 0.48%

As I mentioned in the previous section, cap-weighting tends to skew the large-cap REIT ETFs toward a handful of very large REITs that tend to have mediocre yields. This brings me to two small-to-mid-cap REIT ETFs: The PowerShares KBW Premium Yield Equity REIT (KBWY) and the IQ US Real Estate Small Cap ETF (ROOF).

There is a lot to like about the small-cap sector. Because the REITs are smaller and less followed by Wall Street, you often can find better pricing and higher yields. You have to do your homework and look at the underlying property portfolios for signs of overconcentration in certain markets or deteriorating tenant quality. But with that added bit of work comes the potential for a lifetime of higher dividend payments.

Of course, with an index fund like KBWY or ROOF, you can avoid the homework by just buying the entire basket. However, both KBWY and ROOF are small in terms of assets under management and have fairly thin trading volumes, so be careful when buying or selling, and use a limit order.

Also, ROOF might be somewhat poorly named, as it includes both mortgage REITs and traditional equity REITs. (For anyone needing a review, “equity REITs” hold properties, which are real assets. “Mortgage REITs” hold mortgages and mortgage derivatives, which are paper.)

I like KBWY’s portfolio and consider it worth owning alongside the large-cap Vanguard REIT ETF. National Retail Properties (NNN) is a core holding in several income portfolios I run, and I consider Omega Healthcare Investors (OHI), Government Properties Income Trust (GOV) and Health Care REIT (HCN) to be solid income producers.

And what about sector REIT ETFs?

iShares has multiple offerings on this front, but none are exceptionally appealing.

  • The iShares FTSE Industrial/Office REIT ETF (FNIO) has 32% of the portfolio in just two stocks: ProLogis (PLD) and Boston Properties (BXP). It also has a pitiful $12 million in AUM and trades just 3,000 units per day. This ETF might not be in business a year from now.
  • Likewise, the iShares FTSE NAREIT Retail REIT ETF (RTL) is heavily weighted in just one stock — Simon Property Group, at 22% of the portfolio — and trades just 8,000 shares per day.
  • The iShares FTSE NAREIT Residential REIT ETF (REZ) is the only sector REIT fund that has any volume to speak of, at 70,000 shares traded per day, but even this is too low a volume for a larger portfolio. This residential REIT ETF is also the best diversified of the lot, though I do not consider apartment REITs particularly attractive at current prices and yields.

With the housing market recovering and with the “Echo Boomers” (aka Generation Y or the Millennials) mostly moved out of their parents’ basements and into apartments of their own, the strong demand that has underpinned the sector is looking a little more tepid. This doesn’t mean the sector is facing a pending crash, mind you. But I don’t see the growth going forward, and 2.9% is not a high enough yield to warrant holding based on income alone.

Finally, I should say a word about mREITs.

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