Vanguard REIT ETF (NYSE: VNQ) has a three year annualized return of 16.1%, outperforming the 11.4% gain posted by the S&P 500.
“REITs have historically earned returns between bonds and stocks due to their stable income streams and potential for capital appreciation,” said Daniel Farley, a senior managing director at State Street Global Advisors. “In the shorter term, our expected return models suggest that REITs have begun to look mildly expensive, but the appeal of their income features seems likely to foster continued support for the asset class in the current low interest environment.”
“Equity REITs are a hybrid asset class, offering yield and the possibility of capital appreciation,” according to Morningstar analyst Abby Woodham. “These firms generate income by managing properties and collecting rent. They are required to distribute at least 90% of their taxable income to shareholders, which is the source of their desirable yield. In the past, REITs were viewed as a liquid way to buy commercial real estate and improve a portfolio’s diversification. Real estate also has some inflation-hedging qualities.”
Currently, the recovering economy is supporting the REIT sector. The residential real estate market has turned around and commercial real estate prices are also rising. As the economy produces more jobs, we are seeing rising rents and improving occupancy levels.
“Since 2007, REITs have taken advantage of low interest rates and refinanced their debts,” Woodham added. “Many have rock-solid balance sheets and improving cash flow.”
However, a rising interest rate environment could weigh on REIT investments, especially companies that have not refinanced to take advantage of low rates.
Potential investors should know that REIT dividends are mostly taxed as income. Firms will pass on the majority of earnings, along with the tax liability, to shareholders.
There are a number of REITs-related ETFs.
The Vanguard REIT ETF tracks the MSCI US REIT Index, which includes a broad range of REITs companies, except mortgage REITs. VNQ has a 3.37% 12-month yield.
The fund has 121 holdings and the top ten make up 42.3% of the overall portfolio. Top holdings include Simon Property 10.7%, Public Storage 4.7%, HCP 4.6%, Ventas 4.3% and Equity Residential 4.1%.
The iShares Dow Jones US Real Estate Index Fund (NYSE: IYR) tries to reflect the performance of the Dow Jones U.S. Real Estate Index, which includes real estate companies and REITs. IYR has a 3.52% 12-month yield.
The ETF has 95 holdings and the top ten make up 39.2% of the overall portfolio. Top holdings include Simon Property 8.6%, American Tower 5.1%, HCP 3.8%, Ventas 3.7% and Public Storage 3.7%.
Source: Tom Lydon, ETF Trends
Vanguard REIT ETF (NYSE: VNQ) is a component of the D2 Capital Management Multi-Asset Income Portfolio.
The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.
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