For real estate mutual funds and exchange-traded funds (ETFs), the 2018 story, to this point, is split into two chapters. Amid expectations for rising interest rates, which came to pass, rate-sensitive real estate ETFs and mutual funds slumped in the first several months of 2018.
Just look at the Vanguard Real Estate ETF (NYSEARCA:VNQ). The largest real estate ETF by assets is barely breaking even a year-to-date basis, with much of its seemingly lethargic performance attributable to first-quarter struggles. However, over the past six months, VNQ is higher by nearly 13%, indicating real estate ETFs and mutual funds are on the comeback trail.
VNQ is just one example of a real estate ETF, but it is considered one of the sector’s benchmark funds and its recent resurgence can be seen as a sign that the sector is effectively pricing in the specter of more rate hikes. Here are some real estate mutual funds and ETFs for income-hungry investors to look into before 2018 ends.
Real Estate Funds to Buy: Fidelity MSCI Real Estate Index ETF (FREL)
Expense Ratio: 0.084% per year, or $8.40 on a $10,000 investment.
Fidelity is continually boosting its image as a provider of low-cost funds. Its sector ETFs are the cheapest in the industry and that includes the Fidelity MSCI Real Estate Index ETF (NYSEARCA:FREL), which is the least-expensive real estate ETF in the U.S.
FREL is a basic, plain vanilla real estate ETF. The Fidelity fund tracks the MSCI USA IMI Real Estate Index, which is comparable to the index the aforementioned VNQ follows. FREL is cap-weighted and holds 172 stocks.
This real estate ETF’s annual fee is about 40 basis points below the asset class median, but FREL’s three-year annualized return of 8% is well-above the asset class median, according to issuer data.
Real Estate Funds to Buy: Vanguard Global ex-US Real Estate ETF (VNQI)
Expense Ratio: 0.14%
Across many sectors, ex-U.S. developed markets stocks feature higher dividend yields than their U.S. counterparts. There are instance of this being true in the real estate sector as well. Enter the Vanguard Global ex-US Real Estate ETF (NASDAQ:VNQI), the international cousin to the domestic VNQ.
The trailing 12-month dividend yield on VNQI is 4.9%, or nearly 100 basis points above the yield on VNQ. This international real estate features a broad lineup of over 600 stocks from more than 30 countries, but its geographic exposure is dominated by the Asia-Pacific region. Japan, Hong Kong, China and Australia combine for over 54% of VNQI’s weight.
Overall, VNQI allocates 20.6% of its weight to emerging markets real estate names. This real estate ETF is also a good idea for investors looking for mid-cap exposure because the median market value of the fund’s holdings is $6.8 billion, putting it in mid-cap territory.
Real Estate Funds to Buy: Global X SuperDividend REIT ETF (SRET)
Expense Ratio: 0.58%
The Global X SuperDividend REIT ETF (NASDAQ:SRET) leads something of an anonymous existence relative to other real estate ETFs, but that does not diminish this fund’s income-generating capabilities. Look at that trailing 12-month of 8.58%, which is well above the category average.
“SRET accesses 30 of the highest yielding REITs in the world, potentially increasing a portfolio’s yield,” according to Global X.
While SRET is a global ETF, U.S. real estate investment trusts (REITs) represent almost 87% of the fund’s weight and just three other countries are found in the fund. SRET devotes over 43% of its weight to mortgage REITs, which can be sensitive to changes in interest rates, but SRET has been mostly durable this year, returning almost 11% over the past six months. The fund pays a monthly dividend.
Real Estate Funds to Buy: IQ US Real Estate Small Cap ETF (ROOF)
Expense Ratio: 0.69%
Small-cap stocks and funds are among this year’s U.S. equity market stars, a theme that is extending to real estate ETFs. The IQ US Real Estate Small Cap ETF (NYSEARCA:ROOF) is up 2.4% year-to-date. Although that lags broader small-cap benchmarks, ROOF is outpacing many of large-cap real estate ETFs. Plus, ROOF is up almost 17% over the past six months.
The weighted average market value of ROOF’s 74 holdings is $1.86 billion, putting it at the higher end of the small-cap spectrum. This real estate ETF is a play on consumer discretionary trends via an almost 34% combined weight to retail and hotel REITs.
For small-cap investors looking for a conservative, income-generating idea, ROOF makes sense. This real estate ETF is slightly less volatile than some diversified small-cap benchmarks and yields 5.3%, or more than quadruple the dividend yield on the Russell 2000 Index.
Real Estate Funds to Buy: iShares Residential Real Estate ETF (REZ)
Expense Ratio: 0.48%
Its name implies it is focused on residential REITs, but the iShares Residential Real Estate ETF (NYSEARCA:REZ) has some more substance to it. Residential REITs represent over 48% of this real estate ETF’s weight, but healthcare and specialized REITs combine for over half of the fund’s roster.
There are some modest drawbacks to considering a real estate mutual fund or ETF focusing on residential REITs. In the case of REZ, its trailing 12-month yield is slightly below that of the Dow Jones U.S. Real Estate Index, but the fund’s three-year standard deviation is higher than that real estate benchmark’s.
On the other hand, REZ is beating the Dow Jones U.S. Real Estate Index by about 35 basis points year-to-date.
Real Estate Funds to Buy: T. Rowe Price Real Estate Fund (TRREX)
Expense Ratio: 0.73%
Minimum Investment: $2,500
The T. Rowe Price Real Estate Fund (MUTF:TRREX) is an example of an actively managed real estate mutual fund. There is a minimum investment of $2,500 for this real estate mutual fund and additional investments must be at least $100.
TRREX is a relatively focused fund. As of the end of July, this real estate mutual fund had just 38 holdings with a median market capitalization of $9.09 billion, giving it a mid-cap feel. TRREX has been slightly less volatile than rival passive real estate ETFs and its turnover rate is a palatable 2.3%, which can minimize additional expenses.
This real estate mutual fund has five- and 10-year Morningstar ratings of three stars. Over the past five years, 10 years and since inception, TRREX has outperformed its Lipper category average.
Real Estate Funds to Buy: Invesco KBW Premium Yield Equity REIT ETF (KBWY)
Expense Ratio: 0.35%
The Invesco KBW Premium Yield Equity REIT ETF (NASDAQ:KBWY) is another example of a real estate ETF that is a seductive yield play. KBWY, which focuses primarily on mid- and small-cap real estate stocks, has a 12-month distribution rate of 7.22%. That is lofty relative to the broader universe of traditional real estate mutual funds and ETFs.
High dividend funds and stocks are often vulnerable to rising interest rates, a trait that explains the drubbing KBWY suffered early this year. To its credit, KBWY is participating in the real estate resurgence, returning almost 13% over the past half year.
This real estate ETF is worth a look for long-term investors because of its value tilt. Nearly 84% of KBWY’s holdings are classified as small- and mid-cap value stocks. The combination of value and small size is one of the most efficacious investment combinations over long holding periods.
As of this writing, Todd Shriber owns shares of VNQ.