- The oldest available Real Estate ETF has outperformed an S&P 500 index fund by 3.49% CAGR over the last 18 years.
- The REIT asset class has had great returns since the 1970’s when this asset class started to be tracked.
- Real Estate funds have been excellent low correlation asset diversifiers for investor’s portfolios
- Evidence shows us that REIT funds can outperform owning investment real estate directly
- There are currently 27 ETFs that fall under the Morningstar Category called Real Estate. 8 of those ETFs are 10 years old or older.
IYR vs S&P 500: July 2000 – September 2018
Source: https://www.portfoliovisualizer.com/
The iShares U.S. Real Estate ETF (IYR) is the oldest available REIT ETF available. The inception date was June 6, 2000. Since inception, this ETF has produced a 9.30% CAGR. When compared to an S&P 500 index fund, at 5.81% CAGR, these results are phenomenal. In addition to great returns, diversified investors enjoyed a relatively low correlation of 0.65 to the broad U.S. Equity Markets.
REIT Index vs U.S. Large Cap Blend: January 1994 – August 2018
Source: https://www.portfoliovisualizer.com/
The REIT index has slightly underperformed a U.S. Large Cap Blend index by 0.30% CAGR over the last 24 years. Due to the low correlation coefficient of 0.56, this underperformance does not deter me from investing in this asset class. Low asset correlation gives the long-term investor the opportunity to zig when the market zags. Additionally, there is evidence that the Real Estate asset class has significantly outperformed the Large Cap Blend asset class since 1977.
One of my favorite investing mentors, Paul Merriman, put out an article in 2015 titled “10 things you need to know about REITs”. In point number three of that article, he described the outstanding long-term performance of the REIT asset class. “REITs have a long history of producing good returns. From 1975 through 2006, U.S. REITs had an annualized return of 16.7% — hence their popularity in 2007. From 1975 through 2014, the figure was almost as favorable: 14.1%. That’s more than the 12.2% return of the Standard & Poor’s 500 Index SPX, but less than the 15.1% return of U.S. large-cap value stocks.” If you have any intentions of investing in the Real Estate asset class, I highly recommend reading the rest of Paul’s article.
For investors who are on the fence in deciding whether to invest in a REIT fund or rental real estate property, I’d like to recommend an article I found on Seeking Alpha by Jussi Askola: REITs Vs. Rentals: What’s The Best Way To Invest In Real Estate. He does an excellent job of describing the pros and cons of both REIT funds and investment property ownership. Here’s just one short excerpt and the associated chart from that article: “From 1977 until 2010, REITs have returned more than 12% per year according to EPRA. In comparison, private real estate investors returned between 6.4% and 8.7% per year on average depending on their underlying strategy. (Core, Core+, Value-add, Opportunistic)”
Source: https://seekingalpha.com/article/4204857-reits-vs-rentals-best-way-invest-real-estate
There are currently 27 ETFs that fall under the Morningstar Category called Real Estate. 8 of those ETFs are 10 years old or older. I have ranked those 8 funds based on long-term performance in the chart below:
Source: https://www.morningstar.com/
The top 4 funds in the Real Estate category were REZ, VNQ, USRT and RWR.
REZ vs VNQ vs USRT vs RWR: June 2007 – September 2018
Source: https://www.portfoliovisualizer.com/
Here’s how those 4 fund performed vs the S&P 500:
REZ vs VNQ vs USRT vs RWR vs SPY: May 4, 2007 – October 6, 2018
Source: https://www.koyfin.com/home
Now, let’s look at the stated product objectives and features of these top 4 Real Estate funds:
REZ – The iShares Residential Real Estate ETF seeks to track the investment results of an index composed of U.S. residential, healthcare and self-storage real estate equities. Exposure to the U.S. residential real estate sector. Targeted access to a subset of domestic real estate stocks and real estate investment trusts (REITs), which invest in real estate directly and trade like stocks. Use to diversify your portfolio and express a view on a specific U.S. real estate sector. (Best performance)
VNQ – Vanguard Real Estate ETF – Invests in stocks issued by real estate investment trusts (REITs), companies that purchase office buildings, hotels, and other real property. Goal is to closely track the return of the MSCI US Investable Market Real Estate 25/50 Index. Offers high potential for investment income and some growth; share value rises and falls more sharply than that of funds holding bonds. Appropriate for helping diversify the risks of stocks and bonds in a portfolio. (Most diversified – 187 companies)
USRT – The iShares Core U.S. REIT ETF seeks to track the investment results of an index composed of U.S. real estate equities. Low cost access to diversified U.S. REITs (Real Estate Investment Trusts). Seek income and growth with broad exposure to U.S. real estate across property sectors. Use at the core of a portfolio for long term exposure to U.S. real estate. (Highest dividend)
RWR – The SPDR® Dow Jones® REIT ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the Dow Jones® U.S. Select REIT IndexSM (the “Index”). Seeks to provide exposure to the publicly REIT securities in the U.S. To be included in the Index, a company must be both an equity owner and operator of commercial and/or residential real estate, have a minimum total market capitalization of $200m, derive at least 75% of its total revenue from the ownership and operation of real estate assets. Each REIT in the Index is weighted by its float-adjusted market capitalization. (Best 15+ year performance)
Why I own REZ:
- Outstanding 11-year track record
- Portfolio tilted towards residential, healthcare and storage REITs
The Real Estate asset class is an important part of a well-diversified worldwide equity portfolio. I believe REIT fund investors will do very well long-term by selecting and owning any of the top 4 ETFs in this category. I also recommend a relatively high asset allocation to one of these funds. I think anywhere from 5% to 20% is enough. We currently hold about 15% of our equity assets in REIT funds.
Thank you for taking time to read this article. If you found it useful, please share it with a friend.
Respectfully yours, Micah McDonald, aka the Deep Value ETF Accumulator
Disclosure: We own shares of REZ and intend to buy more shares in the future. I am not a professional investment advisor. Please perform your own due diligence or seek assistance from a Registered Investment Advisor prior to investing in any fund mentioned in this article.
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