The Zacks Analyst Blog Highlights: Vanguard REIT ETF, iShares Dow Jones U.S. Real Estate Index Fund and SPDR Dow Jones REIT ETF
CHICAGO, Nov. 20, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Vanguard REIT ETF (AMEX:VNQ-Free Report), iShares Dow Jones U.S. Real Estate Index Fund (AMEX:IYR-Free Report) and SPDR Dow Jones REIT ETF (AMEX:RWR-Free Report).
Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.
Here are highlights from Wednesday's Analyst Blog:
REIT ETFs for Income, Diversification
As investors continue their quest for yield in the current environment of rock-bottom interest rates, REITs have become increasingly popular due to their solid dividend payouts. In addition to attractive income, REITs have rewarded investors with excellent capital appreciation over longer term.
REITs add diversification benefits to the portfolio and also act as an inflation hedge, thus they deserve a place in any diversified portfolio. (Read: 3 Excellent ETFs for a Low Cost Diversified Portfolio)
What are REITs?
REITs own and operate income-producing real estate. They are required to distribute at least 90% of their taxable income to shareholders annually in the form of dividends and in turn, they can deduct those dividends paid from their corporate taxable income.
The Outlook Remains Strong
With gradually improving economy and low interest rates, the outlook for REITs remains quite positive. Industry fundamentals are expected to remain strong going forward too with increasing rents and improving occupancy.
REITs in general are now much less leveraged compared to historical levels and many have refinanced their debt at much lower interest rates. Also, many REITs were able to acquire premium properties at attractive prices during the downturn. (Read: 2 Sector ETFs to Benefit from the Crude Oil Slump)
REITs in a Rising Rate Scenario
REITs tend to underperform the broader market in a rising rate scenario and that's why they were hit hard after the Fed's tapering announcement last year. But despite QE wind down, interest rates have actually declined this year, leading to REITs' outperformance for most part of this year.
In fact, concerns regarding the Fed raising interest rates earlier than expected had led to some decline in REITs in September but after the FOMC meeting clearly indicated that the Fed is in no hurry to raise rates, investors returned to REITs.
At the same time, investors should remember that if the rise in rates is slow and due to an improving economy, REIT are likely to be less affected and may in fact stabilize after an initial shock. Higher occupancy and rents may offset the impact of more expensive debt servicing. (Read: ETF Winners from Q3 Earnings Season)
REITs in a Portfolio
REITs can provide diversification benefits to a portfolio due to their low correlation with most other asset classes. Research shows REITs are highly correlated with equities in the short term but over longer term they exhibit positive correlation with real estate and low or even negative correlation with equities. Thus, they add diversification benefits to the portfolio.
On valuation basis, REITs do look expensive compared with the broader markets, after their nice run-up since 2009, but given solid outlook, they are expected to continue to do well in the near-to-mid term.
Vanguard REIT ETF (AMEX:VNQ-Free Report)
VNQ tracks the MSCI US REIT Index that covers about two-thirds of the value of the entire U.S. REIT market. Launched in September 2004, this fund has attracted more than $26 billion in assets so far, making it the most popular product in this space.
The fund has highest allocation to Retail REITs (26%), followed by Residential REITs (16%) and Healthcare and Office REITs (13% each). Simon Property, Public Storage and Equity Residential occupy the top three spots in terms of exposure.
The fund is one of the low cost choices in the space, charging only 10 bps in annual fees from investors. It currently yields a solid 3.6% in annual dividends. VNQ is up more than 22% in the last one year.
iShares Dow Jones U.S. Real Estate Index Fund (AMEX:IYR-Free Report)
Launched in June 2000, IYR has so far garnered $5.1 billion in assets. It chares 43 bps in annual fees and pays out an attractive 12-month dividend yield of 3.5%. The fund holds 110 securities in the basket and like VNQ, Simon Property occupies the top spot while American Tower and Public Storage rounded out the top three.
Among sector holdings, Specialty REITs (31%), Retail REITs (20%) and Industrial REITs (17%) occupy the top three spots. IYR has returned 21% over past 12 months.
SPDR Dow Jones REIT ETF (AMEX:RWR-Free Report)
RWR made its debut in April 2001 has amassed over $2.9 billion in assets so far. It charges investors 25 basis points annually for operating expenses.
Simon Property, Public Storage and Equity Residential occupy the top spots in the ETF. Looking at the sector exposure, Apartments take the top spot in the basket with more than 17% share while Regional Malls (17%) and Healthcare (13%) round out the top three.
The fund pays out about 2.9% in annual dividend yield. RWR is up almost 24% in last one year.
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