The largest REIT ETF is the Vanguard REIT Sector ETF (VNQ), with $14.9 billion in assets and 111 holdings. The fund has an expense ratio of 0.10% and a 3.24% yield. It offers exposure to a range of REIT sectors, such as industrial properties and office buildings, residential properties, hotels and other real estate (it does not include exposure to mortgage REITs).
The second-largest ETF is the iShares Dow Jones U.S. Real Estate Index Fund (IYR), with $4.6 billion in assets and 85 holdings. This fund comes with a 0.47% expense ratio and a 3.4% yield. It is similar to other broad REIT ETFs like Vanguard's, but includes exposure to the U.S. mortgage REIT market.
Still, for advisors more interested in target exposure, there are a number of ETFs that hone in on specific segments of the real estate market. For example, the Market Vectors Mortgage REIT ETF (MORT) tracks companies that purchase or service commercial or residential mortgage loans or other mortgage-related securities. The ETF has a 0.40% expense ratio and an impressive 9.68% yield. However, the fund is concentrated, with significant exposure to two companies, Annaly Capital (NLY) at 18.8% and American Capital Agency (AGNC) at 15.3%.
The iShares FTSE NAREIT Mortgage Plus Capped Index Fund (REM) also follows residential and commercial mortgage REITs. The fund has an expense ratio of 0.48% and provides an attractive 11.28% yield. But this one is also top heavy, with 19.5% allocated to NLY and 18.5% to AGNC.
Mortgage REITs account for around 10% of REIT investments. If interest rates increase, they could decrease mortgage REIT book values, and future financing would be more expensive. But that is not much of a problem now.
Currently, the commercial mortgage-backed securities (CMBS) market is showing a remarkable recovery. Rising rental rates in key markets, the reinvigorated capital markets and a promise that interest rates will remain at record lows have all helped support the CMBS market. With interest rates at their low levels, many companies are jumping at the opportunity to refinance their debt, which will translate to greater earnings.
Other Sectors
Office REITs invest in office buildings and receive rental income on long-term leases, and advisors should be wary that the state of the economy, the unemployment rate, vacancy rates and capital are all deciding factors in this sub-sector.
Those interested in this market might consider the iShares FTSE NAREIT Industrial/Office Capped Index Fund (FNIO), which allocates 62.5% to office space, 25.6% to industrials and 11.7% to a mix of other types of real estate. The fund has a 0.48% expense ratio and a 2.99% yield. But it is concentrated as well, heavily tilted toward Boston Properties (BXP) at 19.0% of holdings and Prologis (PLD) at 18.5%.
Advisors more inclined toward the residentials may opt for something like the iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ). This fund comes with a 0.48% expense ratio and a 2.90% yield. The majority of its holdings, 47.6%, are in apartment properties, but the fund also allocates a significant amount to health care at 34.1% and self-storage facilities at 14.7%.
The iShares FTSE NAREIT Retail Capped Index Fund (RTL) primarily tracks companies offering financing to shopping malls, which account for 48.9% of the portfolio, and other retail centers, which make up 39.1%. Simon Property Group (SPG) is this ETF's largest single holding at 22.0%.