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.
REIT ETFs to Buy for the Income: Schwab U.S. REIT ETF (SCHH)
Expense ratio: 0.07%, or $7 per $10,000 invested.
For investors who like low-cost sector funds, there are some credible options in the realm of REIT ETFs, including the Schwab U.S. REIT ETF (NYSEARCA:SCHH).
With an annual fee of just 0.07%, this is one of the least expensive sector ETFs on the market, REIT or otherwise. That is not surprising as Schwab, the fifth-largest U.S. ETF issuer, is a major player when it comes to modest fees.
SCHH holds 141 real estate stocks and tracks the Dow Jones U.S. Select REIT Index. The ETF’s top 10 holdings, which combine for more than 40% of its weight, include well-known REIT fare such as Simon Property Group Inc (NYSE:SPG), Public Storage (NYSE:PSA) and Boston Properties, Inc. (NYSE:BXP).
SCHH’s trailing 12-month distribution is 2.64%. Investors can find higher yields among REIT ETFs, but the Schwab ETF still yields more than the S&P 500 and medium-term government debt.
REIT ETFs to Buy for the Income: PowerShares KBW Premium Yield Equity REIT Portfolio (KBWY)
Expense ratio: 0.35% annually, or $35 on a $10,000 stake.
For the investor that wants big yields on their REIT ETFs, the PowerShares KBW Premium Yield Equity REIT Portfolio (NASDAQ:KBWY) fits the bill. Do not adjust your screen, but KBWY yields 7.34% on a 30-day SEC basis, according to issuer data.
KBWY follows the KBW Nasdaq Premium Yield Equity REIT Index, a dividend-weighted benchmark. Investors should also note that this real estate ETF focuses on small- and mid-cap stocks. The average market value of the fund’s 30 holdings in $1.9 billion, putting it in small-cap territory.
The $322.4 million KBWY carries a five-star Morningstar rating and is up 36.8% over the past five years, topping the Dow Jones U.S. Real Estate Index by 460 basis points.
REIT ETFs to Buy for the Income: Tierra XP Latin America Real Estate ETF (LARE)
Expense ratio 0.79%, or $79 per $10,000 invested.
The opportunity set with real estate investments is not confined to the U.S. There are several international REIT ETFs with one of the more unheralded being the Tierra XP Latin America Real Estate ETF (NYSEARCA:LARE).
Perhaps the Tierra XP Latin America Real Estate ETF flies under the radar because many investors do not associate Latin America with real estate investing. Perhaps they should.
LARE is up more than 32% over the past year, outpacing the traditional Brazil and Mexico ETFs over that period. Brazil and Mexico, Latin America’s two largest economies, are LARE’s largest country allocations.
This real estate ETF closed 2016 with a whopping dividend yield of almost 13%, but that does not mean increased risk. In fact, LARE has been less volatile than traditional gauges of Brazilian stocks since coming to market 18 months ago.
Remembering that lower interest rates often help real estate investments, and it is worth noting that the Brazilian central bank has been consistently cutting borrowing costs since late last year.
As of this writing, Todd Shriber owns shares of VNQ.