REIT ETFs and Their Underlying Indexes – VNQ, IVY, IYR and RWR

Real Estate Investment Trust (REIT), allows the investor to pool their capital into a fund large enough to purchase real estate, usually commercial estate, so investors can share rents as a stable cash flow income. REITS can be traded on the stock exchanges; hence, there is liquidity already. There are about 200 REIT listed in U.S. exchange. Slicing dicing from these 200 some REIT stocks, and wrapping them into ETF products is a feasible strategy to bringing in diversification as well as a specialty in certain real estate types, such ETFs are VNQ, IVY, IYR, and RWR.

The Vanguard U.S. REIT fund, VNQ, was launched to the market in September 2004, has amassed $34.02 billion assets since. The expense ratio is only 0.12%, average spread is 0.1%, deep liquid, and fair cheap. It follows MSCI US REIT index, REITS categorization is based on Global Industry Classification System (GICS). It is worth noting that Effective September 1, 2016, GICS’s Real Estate is being moved out from under the Financials Sector and is being promoted to its own sector. The Real Estate Investment Trusts (REITs) Industry is being renamed to Equity Real Estate Investment Trusts (REITs) and excludes Mortgage REITs. REITs eligible for inclusion in the MSCI US REIT Index are REITs that are included in the MSCI USA IMI and that exhibit the following characteristics:  Real estate exposure (i.e., only selected Specialized REITs are eligible); REIT tax status (i.e. companies are not eligible before the beginning of their first fiscal year in which they are expected to be treated as REIT for tax purpose). Specialty REITs requires them to only operate properties of Storage and self-storage facilities, Data Centers, Correctional Facilities, Theaters, Casinos and gaming facilities, and Restaurants.

IVY, the iShares Dow Jones U.S. Real Estate ETF, tracks Dow Jones U.S. Real Estate Index, which is a stalwart of the REIT space.  There are roughly 100 holding companies in it. all U.S. big names in Real Estate is included in this index.

IYR, the iShares Dow Jones U.S. Real Estate ETF, issued by BlackRock even earlier in 2000, only accumulated $4.2 billion AuM so far, probably because its expense fee is high as 0.44%, almost quadrupled that of VNQ. It tracks Dow Jones U.S. Real Estate Index. This index’s methodology states companies must reside on the Supersector 8600 in their proprietary classification system, which includes 10 broad Industries, 19 Supersectors, 41 Sectors, and at the most granular level, 114 Subsectors. From this description, seems it is not the GICS prevalently used.

RWR, the SPDR Dow Jones REIT ETF, is benchmarked against the Dow Jones U.S. Select REIT Index. This index screens out smaller REITs. It applies a modified capitalization weighting scheme.

Let’s glance at their performances compared to the U.S. broad market proxy, S&P 500.

Unfortunately, they all underperformed the market price wise, but the investors are more banking on the stable income from the rents, not from the price appreciation of funds themselves.


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