Know The Important Differences Between REIT ETFs

As 10-year Treasury yields surged in the first half of the year, exchange traded funds holding real estate investment trusts (REITs) were burned as investors headed for the exits. The Vanguard REIT ETF VNQ and the iShares U.S. Real Estate ETF IYR, two of the most popular REIT ETFs, have bled $541.4 million and $1.67 billion in assets year-to-date.

Still, REIT ETFs are undoubted hits with investors. Led by VNQ, the largest ETF from this genre, the 33 dedicated REIT ETFs on the market have over $51 billion in combined assets under management, according to S&P Capital IQ.

Year-to-date, VNQ and IYR are each up about 4 percent, but those returns diverge over shorter and longer time frames, indicating investors should know what these ETFs hold before hitting the buy button. For example, IYR has topped VNQ by nearly 100 basis points over the past six months while the Vanguard fund has outpaced its iShares rival by almost 1,000 basis points over the past five years.

Retail, residential and office REITs are the dominant groups found in VNQ, combining for 56 percent of that ETF's weight. Conversely, IYR devotes the same amount to specialized, residential and retail REITs.

“S&P Capital IQ has a positive fundamental view of the retail REIT group, which is comprised of shopping mall operators. Cathy Seifert, an equity analyst for S&P Capital IQ, thinks increasing absorption of retail space should present retail landlords with more pricing power. Most of the retail REITs have long-term leases with their customers, with embedded rent adjustments that should help insulate them from economic fluctuations,” said S&P Capital IQ in a recent research note.

Another important difference between these two REIT ETFs, particularly for investors planning to be long-term holders of either fund, is the annual fee sported by each fund. VNQ charges just 0.12 percent per year, making it one of the least expensive REIT ETFs on the market. IYR charges nearly quadruple that, or 0.45 percent per year. Said another way, a $10,000 stake in VNQ means an investor loses $12 per year in fees, but the same investment in IYR costs $45 each year.

For the investor that makes costs the most important consideration, the Schwab US REIT ETF SCHH charges just 0.08 percent per year, or $8 for every $10,000 invested.

"The other major industry for REIT investors to understand is specialized REITs, which is a myriad of companies driven by fundamentals ranging from cell phone towers to pulp and timber, all of which have opted to operate under a REIT structure. The other major industry for REIT investors to understand is specialized REITs, which is a myriad of companies driven by fundamentals ranging from cell phone towers to pulp and timber, all of which have opted to operate under a REIT structure,” said S&P Capital IQ.