Real-estate ETFs can consist of real-estate-investment trusts, or REITs, or a mixture of REITs and stocks of companies in the property sector. Some focus on the U.S. market, while others provide international exposure. They generally feature low fees, a big advantage over actively managed real-estate funds, says Ben Johnson, director of global ETF and passive strategies at Morningstar. Schwab U.S. REIT ETF (SCHH), for one, a $4.84 billion fund with a 5.44% return this year through August, charges expenses of 0.07%, he says, compared with a median of 1.10% for the Morningstar real-estate category, excluding ETFs.
Nevertheless, this has been a bumpy year for the funds. Mr. Johnson says funds in Morningstar’s real-estate category (including ETFs) saw an average return of 3.63% through the end of August, compared with 10.5% for the MSCI USA Index. These “relatively lackluster” returns are partly attributable to rising interest rates, Mr. Johnson says, “which can serve as a short-term headwind for this rate-sensitive sector.”
Michael Iachini, head of manager research for Charles Schwab Investment Advisory, says REIT ETFs “do not move in lockstep with either stocks or bonds.” But they do offer the potential for diversification and income. Through the end of August, he says, Morningstar data show a trailing 12-month yield of 4.05% for the average ETF in the financial firm’s real-estate category, compared with 1.38% for the average large-blend ETF.
When REIT ETFs are used to diversify a portfolio, investors should be comfortable with returns that vary from the broad market, depending on how much they invest in the area, says Rich Powers, head of ETF product management at Vanguard, which runs Vanguard Real Estate ETF (VNQ), the largest U.S. real-estate ETF, with assets of about $33 billion. More than 96% of the fund is invested in REITs, he says.
“These funds have historically provided investors with non-market-correlated returns and diversified income opportunities,” he adds.
Daniel Prince, head of iShares U.S. Wealth Advisory Product Consulting, which runs U.S.-focused and global real-estate ETFs, says investors have started returning to real-estate ETFs after a rocky first half. In the first five months of 2018, he says, there were about $2.25 billion of outflows from U.S.-listed real-estate ETFs, and outflows of $116 million in those listed in other countries. However, June and July saw inflows of just under $1.68 billion in the U.S. and almost $2.6 billion internationally.
Experts agree that focusing too much on U.S. real estate can be a mistake. It is important to diversify internationally, says Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors, which runs a number of real-estate ETFs, including SPDR Dow Jones Global Real Estate ETF (RWO), a $2.4 billion fund that has seen returns of 2.05% through August. Mr. Bartolini says REIT ETF investors should invest in funds with properties “in the U.S. and outside.” This reduces the risk of being overexposed to local economic sensitivities in a given country, he says.
Investors should remember that the real-estate market could fall in value, says Mr. Iachini. While REITs can help diversify a portfolio, they are “just one piece of the market, and focusing too heavily on them can lead to more portfolio risk than investors might want.”
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