An option for investing in real estate.
The idea of real estate investing often conjures up ideas of house flipping and get-rich-quick seminars, or million-dollar deals to build a high-rise apartment complex. But in reality, everyday investors can be active participants in the real estate investment market via exchange-traded funds. Whether you’re looking to participate in the construction of new homes, the leasing of commercial real estate or the servicing of loans and mortgages, there are a number of ETFs that allow you to get a piece of the action. If you’re looking to invest in the real estate market, here are seven different ways to play the sector using ETFs.
Vanguard REIT ETF (ticker: VNQ)
The largest real-estate focused ETF by assets, this Vanguard fund is a one-stop shop for a wide variety of real estate businesses. As of this writing, about 20 percent of the fund is invested in retail companies, 16 percent in residential and about 13 percent office real estate. The biggest catch worth noting is that this fund is focused on real estate investment trusts. This is a special kind of publicly traded company that directly owns or invests in real estate. As such, it is a pure play on real estate and thus more sensitive to things like changes in property values.
PowerShares KBW Premium Yield Equity REIT Portfolio (KBWY)
Of course, a clear focus on REITs is precisely what some investors want. After all, real estate investment trusts get favorable tax and regulatory status because of their structure — and in exchange, shareholders get a mandate that 90 percent of taxable income will be returned directly to them. That’s a mandate for big dividends. And a fund like KBWY intentionally biases toward REITs that offer the biggest paydays. Right now, the yield of this exchange-traded fund is a phenomenal 8.1 percent. And since REITs typically have reliable revenue streams from long-term leases or other real estate-related transactions, that dividend is very sustainable.
Guggenheim S&P 500 Equal Weight Real Estate ETF (EWRE)
On the other side of the coin, however, is a fund that pushes true diversification via an equal weight strategy. Instead of biasing toward the real estate companies with the biggest market value like VNQ or the biggest dividend like KBWY, this Guggenheim fund makes sure all its investments have an equal seat at the table. There are only 33 real estate investment trusts that make up the fund, but each is a roughly 3 percent weight. That ensures that investors can smooth out some of the bumps in the road if one or two companies run into trouble along the way.
SPDR S&P Homebuilders ETF (XHB)
If you want to play residential real estate in a more direct way, then you can invest in the U.S. homebuilding industry via the XHB ETF. Top holdings right now include home improvement retailer Home Depot (HD), builder Lennar Corp. (LEN) and HVAC and thermostat giant Johnson Controls International (JCI). Collectively, the components in this fund represent every element of the residential home building industry. This is primarily a play on residential real estate trends, but the housing market has been booming lately so that could be a good thing. XHB is up more than 30 percent in the last 12 months compared with about 20 percent for the major stock market indices.
iShares U.S. Home Construction ETF (ITB)
If you’d rather not worry about retailers or industrial stocks that have indirect exposure to housing, you can more directly play the small group of companies that actually manufacture residential homes. About 40 percent of the fund’s assets in just five names — D.R. Horton (DHI), Pultegroup (PHM), Toll Brothers (TOL), NVR (NVR) and Lennar Corp. The risk, of course, is that if new home sales suffer either because of an economic downturn or simply less lending and borrowing, the related stocks will suffer significantly. But in an uptrend as we’ve seen lately, the gains can be substantial; ITB is up more than 50 percent in the last 12 months.
Vanguard Mortgage-Backed Securities ETF (VMBS)
While mortgage-backed securities may have gotten a bad name during the financial crisis, better regulatory oversight and risk assessment has helped restore Wall Street’s confidence in these securities. This Vanguard ETF allows investors to play these assets in a reasonably safe and diversified way. With more than 500 bonds that represent many thousands of mortgages, investors in this fund get paid the same way a bank would as homeowners pay interest on their debts. The fund yields about 3 percent, but that may rise as interest rates increase in 2018. And with almost 100 percent of the fund in government backed mortgages, this is one of the safest places to find yield.
SPDR Dow Jones International Real Estate ETF (RWX)
Of course, the U.S. real estate market isn’t the only hot ticket in town. RWX is the oldest international real estate ETF on Wall Street, and can give investors global exposure through more than 100 component investments that span Japan, Australia and Europe. There is a bit of exposure to emerging markets, but this fund is primarily a developed markets investment. For investors looking to diversify their portfolio geographically, as well as across different subsectors of the real estate industry, this could be an attractive option — particularly if you worry the U.S. market is getting a bit too hot to handle.
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7 Ways to Invest in Real Estate with ETFs originally appeared on usnews.com
