IYR iShares US Real Estate

The year 2013 has been good so far for both the equity markets and the ETF industry. The broad benchmarks are hovering near their all-time highs, thanks to improving global sentiments and growing investor confidence.

Though most of the sectors are performing well, the real estate sector has been gaining immense popularity of late, thanks to a gradual recovery in the U.S. economy. (Read: Two Sector ETFs Posting Incredible Gains) Stronger commercial as well as residential real estate fundamentals, upbeat housing data and higher home prices are making securities in this segment attractive at present.

The low interest rate environment and moderate levels of economic growth are stimulating real estate demand. Further, the industry has a good track record of dividend payments, which are arguably the biggest enticement for REIT investors. The U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends to shareholders.

This interesting trend could be due to the higher yield nature of securities in this slice of the market as payouts often exceed what investors see in similar broad market ETFs. (Read: Two Unconventional Sources of ETF Yield)

As a result, for investors looking to make a play on the space, we have highlighted three real estate ETFs that have garnered huge investor interest, making them popular this year. These ETFs have added at least 5% so far in the year (see more ETFs in the Zacks ETF Center).

While the choices look similar, there are some key differences between the products, which we have highlighted below:

Vanguard REIT ETF (VNQ)

Launched in September 2004, this is the largest real estate ETF in the space and tracks the MSCI US REIT Index. The fund gathered over $1.4 billion this year, leading to an asset base to over $17.9 billion.

With holdings of 120 securities, the product puts 43.3% of the assets in top 10 companies, suggesting a moderate concentration across individual firms. Simon Property (SPG) takes the top spot with the largest 10.7% share while Public Storage (PSA) and HCP Inc. (HCP) occupy the other two spots with 4.7% and 4.6% of the assets, respectively. Other firms do not hold more than 4.3% of VNQ.

Looking at real estate market exposure, the fund is well diversified between specialized REITs (30.1%), retail REITs (27.1%), residential REITs (16.5%), office REITs (13.9%), diversified REITs (7.3%) and industrial REITs (5.1%).

Large cap stocks accounts for about 47% of the assets while mid and small cap stocks take the remaining portion in the basket. The fund is liquid as it trades in higher volumes of 2.6 million shares per day on average, signifying that an extra cost of investment is not involved or bid/ask spread is minimal.

The product is one of the low cost choices in the space, charging only 10 bps in annual fees from investors. The ETF gained 6.46% in the year-to-date period and yields a solid 3.3% in annual dividends. (read: Homebuilder ETFs: Can the Rally Continue?)

iShares Dow Jones U.S. Real Estate Index Fund (IYR)

Launched in June 2000, the fund seeks to replicate the Dow Jones U.S. Real Estate Index, before fees and expenses, and holds 89 securities in the basket.

The product pulled in about $231.4 million so far this year, accumulating over $5.1 billion in its asset base while charging 46 bps in fees per year. It is tilted towards the large cap firms with roughly 53% of the asset base and the rest comprising mid and small caps.

IYR pays lesser attention to its top 10 holdings (less than 40% of assets) and is spread well across a variety of securities. Like VNQ, SPG occupies the top position in the basket with 8.6% share while American Tower (AMT) and HCP rounded off to the top three.

Among sector holdings, Specialty REITs, Retail REIT and Industrial REIT take the major chunk of the asset base, with a collective share of 67.7%.

The ETF has added about 6.8% in the year-to-date period and has an impressive yield of 3.5% per annum. IYR is highly traded relative to VNQ. The fund trades with average volume of 8.8 million shares per day.

SPDR Dow Jones REIT ETF (RWR)

This was another successful product this year, attracting $102 million in new capital. This ETF tracks the Dow Jones U.S. Select REIT Index which follows companies that operate commercial real estate properties across the country (read: The Introductory Guide to Real Estate ETF Investing).

The fund has amassed over $2.1 billion in AUM and charges investors 25 basis points a year in fees for its services. Launched in April 2001, the fund holds 85 securities in total with 47.9% of the assets going to top 10 holdings.

Like VNQ, SPG, PSA and HCP occupy the top three positions in the fund’s portfolio. Within the sector, regional malls take the top spot in the basket with 18% share while apartments, healthcare and office round off to the top four.

In terms of yield, the product pays out about 2.9% in annual dividend yields while trading volumes are quite good. With average volume of over 240,000 shares, the product has wider bid/ask spreads relative to VNQ and IYR, ensuring additional cost for the product. The ETF is up 5.1% year-to-date.

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ISHARS-DJ REAL (IYR): ETF Research Reports
 
SPDR-DJ W REIT (RWR): ETF Research Reports
 
VIPERS-REIT (VNQ): ETF Research Reports
 
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