Try and guess the best-performing asset class of the last 15 years.
Biotech stocks? Sorry, try again. Junk bonds? Not enough “oomph.” Private equity? Too high of fees to make it a contender.
Nope. None of these asset classes were the best. The winner is real estate investment trusts (REITs).
According to a recent study by J.P. Morgan Asset Management, the REIT asset class has managed to return an average of 12% per year since 2000. The second place finisher — high yield bonds — only managed a 7.9% annual return. As for large-cap stocks, the S&P 500 only managed a 4.1% return the time frame.
Those results mirror a longer-term study by REIT industry group NAREIT. Here, REITs again were the dominating asset class for nearly 35 years.
That’s plenty of up and down markets/economic conditions.
Meanwhile, investors — both large and small — are woefully under-allocated to the “best asset class” of all time. Currently investors only hold 2% of their portfolios in REITs. Many investors have simply missed the boat when it comes to the REIT industry.
But you don’t have to miss out on the sector’s future gains. Adding exposure to the sector via an REIT exchange-traded fund is easy. Here are three REIT ETFs to buy today.
REIT ETFs to Buy: The Vanguard REIT ETF (VNQ)
Expenses: 0.12%, or $12 per $10,000 invested
Dividend Yield: 3.5%
For investors looking to get their feet wet in the asset class, broad indexing may be the best bet. And there’s a reason why the Vanguard REIT ETF (VNQ) has around $36 billion in assets. It’s simply the broadest way to capture exposure to REITs.
VNQ tracks the MSCI US REIT Index. That index covers nearly two-thirds of the equity real estate investment trusts traded in the U.S. — currently 150 different owners/operators of shopping malls, apartments, office buildings and other properties. Mortgage REITs and Hybrid REITs are not included in the index. Top holdings for the fund include mall giant Simon Property Group Inc (SPG), self-storage kingpin Public Storage (PSA) and healthcare-focused Welltower Inc (HCN).
But broad index exposure doesn’t mean poor returns. VNQ has managed to deliver in the gains department
Since the REIT ETF’s inception back in 2004, VNQ has managed to produce average total returns of 10.04% per year. That certainly beats the pants off of the S&P 500 during that time.
Part of those returns have come from REITs’ and VNQ’s hefty dividend yield. Currently, the fund pays 3.5% yield.
The other part has come from VNQ’s low expenses. As a Vanguard ETF, the fund shares the company’s “low-cost” mantra. Lower costs = more money in your pocket. And at just 0.12%, or $12 per $10,000 invested, VNQ is one of the cheapest REIT ETFs in the game.
REIT ETFs to Buy: iShares Cohen & Steers REIT ETF (ICF)
Sometimes bigger is better.
That certainly might be true when it comes to REITs. During down cycles in the commercial real estate market, the nation’s largest REITs have historically been able to use their size as an advantage to raise capital in order to buy up distressed properties and rivals on the cheap.
Which is why the iShares Cohen & Steers REIT (ICF) could be a good option for investors looking to add REIT exposure.
ICF focuses its attention on the biggest of the big. That means honing in its portfolio on the REITs that dominate their respective property subsectors. You’re looking for apartments? Then AvalonBay Communities (AVB) is the choice. Shopping malls? Simon is the dominate force. As a result, ICF has much smaller portfolio than the previously mentioned VNQ. Currently, this particular REIT ETF holds just 30 names.
That concentrated portfolio has yielded some decent results over its history. As of the end of July, ICF has had annual returns of 6.68% over the last ten years. While that may seem low, there have been periods of time — like during years of market duress — when the biggest REITs have outperformed their smaller twins.
For investors concerned about volatility, ICF could make for a smoother ride.
Expenses for the REIT ETF run at 0.35%.
REIT ETFs to Buy: SPDR Dow Jones International Real Estate (RWX)
The U.S. isn’t the only nation to use the REIT tax structure to allow investment in commercial real estate. In fact, 38 different nations have adopted the REIT structure, and many more are considering it.
With that in mind, investors may want to add a dash of international real estate to their portfolios.
The $4.7 billion SPDR Dow Jones International Real Estate (RWX) offers a way to hone into the opportunity overseas. The REIT ETF tracks 137 of the international world’s largest REITs, property managers and real estate servicing firms.
Some of the names might actually sound familiar to investors. There’s a good chance that you’ve shopped at one of Westfield Corporation’s malls here at home.
Even if you haven’t heard of them, RWX’s portfolio is full of the world’s leading property players.
Performance for the REIT ETF has been less than ideal. It has basically been flat since its inception since 2006. However, the bulk of that lack-luster performance has been due to the dollar’s insane rise. It has managed to clip the fund’s performance. However, with long-term trends in place supporting commercial real estate, RWX could once again shine when the currency relationship resumes some sense of normalcy.
For investors, RWX offers a great way to the world of commercial real estate outside the U.S. Even better, expenses for the fund are only 0.59%.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.