By Carol A. Wood As real estate equities have flourished, so have exchanged-traded funds (ETFs) based on sector indexes. These relatively new offerings -- funds that are priced throughout the trading day and can be be sold short, like stocks -- feature low fees and a degree of diversification in regard to geography, business type (REIT or corporation), and property sector (largely office, industrial, warehouse, retail, and multifamily residential).
Investors can choose from four real estate ETFs, each one based on a different index. They are largely distinguished from one another by the performance and composition of the indexes they track, and by their costs. Three of the funds focus exclusively on REITs (real estate investment trusts). Expense ratios range from a high of 0.60% of assets to just 0.12%.
APARTMENTS SCOOP. Fund outfit Cohen & Steers notes that, because REITs show low correlation with other asset classes, they can diversify an investment portfolio. The firm calculates that the ratio of correlation between its Realty Majors Index (which holds only REITs) and the S&P 500 is 0.23. Between the same index and the NASDAQ, the ratio is only 0.07.
Raymond Mathis, who covers REITs for Standard & Poor's Equity Research, feels most optimistic about lodging and retail REITs. He notes that their fundamentals have improved in the past few quarters, and he expects them to keep getting better.
Mathis says he's more cautious on apartment REITs, even though they have done well as condo values have raised the value of the apartment buildings. "But that's not a fundamental issue of supply and demand," he says. "It could be a temporary blip."
DUE FOR A BREATHER? When it comes to REIT funds, Mathis notes, there's no ETF focused on hotel or office REITs. Instead, investors end up getting a "little bit of everything," he says. Not only are there not that many REIT stocks out there to begin with but also smaller-cap issues tend to be underrepresented because larger funds typically can't buy very much of them.
A caveat to investing in sector funds is their sometimes high volatility. The average U.S. equity real-estate mutual fund has a three-year annualized standard deviation (a measure of volatility) of 15.4%, vs. 13.9% for the S&P 500.
Another thing to keep in mind: Real estate stocks have had strong gains the past five years and could be due for a breather. In other words, investors shouldn't necessarily expect a repeat of the performance, and might consider rebalancing at this stage (see BW Online, 7/14/05, "Real Estate Funds: Beyond the Bubble").
INDEX GUIDE. Several REITs heavily weighted in the indexes figure into each ETF's top 10 holdings. They include Simon Property Group (SPG), Vornado Realty Trust (VNO), General Growth Properties (GGP), and Equity Office Properties Trust (EOP). Even so, important differences exist among the real estate indexes that the current group of real estate ETFs track. Here's a look at each one:
Dow Jones U.S. Real Estate Index
This index seeks to provide a broad measure of the U.S. real-estate securities market. The index currently has 84 components, which make up the real estate portion of the Dow Jones U.S. Total Market Index.
Although the U.S. Real Estate Index consists predominately of REITs, it also includes real-estate operating companies (REOCs). To attain a listing on the index, a company must be based in the U.S., trade on one of the three major exchanges, and have had no more than 10 days of inactive trading during a prior quarter.
The fund based on the index, iShares Dow Jones US Real Estate Index (IYR), launched in June, 2000, making it the oldest real-estate equity sector ETF. As of June 30, portfolio turnover was 20%, vs. an average of 108.4% for equity funds that invest in real estate.
Dow Jones Wilshire REIT Index
The Dow Jones Wilshire REIT Index is a subset of the Dow Jones Real Estate Securities Index and includes only REITs. Its objective is to provide a broad measure of publicly traded REITs.
The index held 93 components as of Mar. 31. The fund based on the index, streetTRACKS Wilshire REIT Fund (RWR), had negligible turnover of 5% as of June 30.
Cohen & Steers Realty Majors Index
Another REIT-focused index, Cohen & Steers Realty Majors Index tracks the performance of large, actively traded U.S. real-estate investment trusts. The fund based on the index, iShares Cohen and Steers Realty Majors Fund (ICF), held 31 components as of June 30.
Diversified by both geographic region and property type, the fund had its largest holdings -- as of Mar. 31 -- in the Pacific region (California, Oregon, Washington; 26%) and the South Atlantic (Maryland, Delaware, Virginia, West Virginia, Washington, D.C., North Carolina, South Carolina, Georgia, Florida; 20%), and the Mid-Atlantic (New York, Pennsylvania, New Jersey; 14%). The top five property classes were office (21%), regional malls (17%), apartments (17%), shopping centers (14%), and industrial (11%).
As of June 30, the index fund experienced turnover of 15%.
Morgan Stanley US REIT Index
The Morgan Stanley US REIT Index was designed as a broad representation of REITs. It consists of REITs included in the MSCI US Investable Market 2500 Index, excluding specialty equity REITs that do not generate a majority of their revenue and income from real estate rental and leasing operations.
The MSCI US REIT index excludes mortgage and hybrid REITs and companies classified under the Global Industry Classification Standard (GICS) "Real Estate Management & Development" subindustry. However, unlike the two Wilshire real estate indexes, the index includes health-care REITs. As of July 1, it held 110 securities.
The fund based on this index, Vanguard REIT VIPER (VNQ), is the newest real estate ETF, established in September, 2004.
ETFS TO WATCH. Here are the four real estate ETFs and their returns through June 30:
Real Estate ETFs
June Return (%)
YTD Return (%)
3-Year Annualized Return (%)
Expense Ratio (%)
iShares Cohen and Steers Realty Majors Fund (ICF)
streetTRACKS Wilshire REIT Fund (RWR)
iShares Dow Jones US Real Estate Index (IYR)
Vanguard REIT VIPER (VNQ)
Wood is a reporter for Standard & Poor's Fund Advisor