As real estate investment trusts (REITs) bounce back, their favorable dividend yields in today’s low interest rate environment are attracting some well-deserved attention. After all, REITs don’t pay taxes and must pay out 90% of their income as dividends. Although some renewed optimism about the economy has lured a lot of money to REITs, the real estate recovery is still quite dicey, so REIT exchange-traded funds (ETFs) are worth considering for a little extra diversification.
Fixed-income investors looking for high yields and low risk have long loved REITs – at least until the dark days of 2007 and 2008, when the market tanked and investments fell by at least 30%. As the real estate market claws its way back, investing in a basket of REITs instead of a single company could be a good way to spread around the risk while taking advantage of the rewards.
That’s where ETFs come in. REITs can be an attractive way to get exposure to the real estate market — if you know which company to choose. REIT ETFs make it easier because you don’t have to choose a specific company. Instead, your investment is diversified across several different REITs (safer if an individual REIT heads south), and ETFs have the added advantage of trading like stocks. REIT ETFs also have cost advantages compared to REIT mutual funds, which can devour dividends with management fees.
So if you’re desperately seeking dividends, here are four REIT ETFs that offer attractive yields, diversified exposure to the real estate market and lower management fees than REIT mutual funds:
Vanguard REIT ETF
The Vanguard REIT ETF (AMEX:VNQ) invests in stocks of the MSCI REIT Index, which comprises real estate investment trust stocks. With a market cap of nearly $8.9 billion, the fund has a dividend yield of 3.49% and a one-year return of about 8%. Top holdings include Simon Property Group (NYSE:SPG) and Vornado Realty Trust (NYSE:VNO). At $56.83, the ETF is trading more than 18% over its 52-week low of $47.10 in August.
SPDR Dow Jones Wilshire REIT ETF
The SPDR DJ Wilshire REIT (AMEX:RWR) is tied to the Wilshire REIT Index and aims to invest in all of the REITs in the index in proportion to their weightings. Top holdings include SPG, VNO, Public Storage (NYSE:PSA) and Equity Residential (NYSE:EQR). With a market cap of nearly $1.4 billion, the fund has a current dividend yield of 3.6%; its one-year return is 8.4%. At $63.49, RWR is trading about 18% above its 52-week low of $52.32 in August.
IShares FTSE NAREIT Mortgage Plus Capped Index Fund
The IShares FTSE NAREIT (AMEX:REM) measures the performance of the residential and commercial mortgage real estate, mortgage finance and savings associations sectors of the U.S. equity market, and it tracks the FTSE NAREIT Mortgage Plus Capped Index. Top holdings include Annaly Capital Management (NYSE:NLY) and American Capital Agency (NASDAQ:AGNC). With a market cap of about $226 million, REM has a current dividend yield over 11%, and its one-year performance is a –1.7%. At about $13, the fund is trading 15% above its 52-week low of $11.28 last month.
Market Vectors Mortgage REIT Income ETF
The Market Vectors Mortgage REIT (AMEX:MORT) is the new kid on the block, just having started up in August. The fund seeks to replicate the price and yield performance of the Market Vectors Mortgage REIT Index. Nearly one-third of the fund’s holdings are in NLY and AGNC; another 18% comprises Chimera Investment Corp. (NYSE:CIM), Hatteras Financial (NYSE:HTS) and MFA Financial (NYSE:MFA). With a market cap of $5.7 million, MORT has a current dividend yield of nearly 3%.
Bottom Line: REIT ETFs have many benefits for fixed-income investors looking for a decent yield and a little more exposure to the real estate market. In addition to watching for another real estate slump that hammers valuations again, investors should keep an eye on President Obama’s Home Affordable Refinance Program (HARP) because a new round of homeowner refinancings likely would weigh on fund payouts.
As of this writing, Susan J. Aluise did not hold a position in any of the investments named here.
