Investing in REIT Index ETFs (12/14)

This quarter, Calpers and S&P Dow Jones Indices both announced big plans to increase their real estate exposure over the next one to two years.

See the article below on Vanguard’s REIT index, symbol VNQ.

ETF PM has long positions in VNQ, ICF and URE.

A Broad, Low-Cost REIT ETF for a Low-Rate Environment

U.S. REITs have dramatically outperformed the market in 2014. Can the party continue?

Robert Godsborough, 12/5/14

Throughout 2014, interest rates have defied many expectations to the contrary by declining. That’s been good news for the United States REIT space, which has performed well this year.

Right now, Morningstar’s equity analysts believe that the U.S. REIT sector as a whole is slightly overvalued. However, our analysts also see pockets of opportunity in certain areas of the REIT landscape, including health care, retail, and cell tower properties. Traditionally, shares of REITs move inversely with changes in long-term government-bond yields, and REITs likely will underperform in a rising-rate environment.

For REIT investors who are skeptical that rates will rise anytime soon, one exchange-traded fund that offers an excellent and low-cost way to gain access to the U.S. REIT sector is Vanguard REIT ETF (VNQ). Far and away the largest U.S. REIT ETF, VNQ holds equity REITs, which manage commercial properties and collect rent. Because most REIT ETFs have very similar holdings, expense ratios are a particularly important consideration when choosing a fund. VNQ’s 0.10% expense ratio makes it one of the cheapest options available. Its market-cap-weighted portfolio contains 138 holdings, which represent almost all of the real estate sector’s total market capitalization. The fund holds a healthy dose of mid- and small-cap stocks (mid- and small-cap stocks make up 34.5% and 19% of the portfolio, respectively). These small firms make up a relatively small component of the total portfolio but help diversify the fund. This fund’s low-cost and diversified exposure to the domestic real estate market make it a suitable ETF for most investors.

Click here for the full article.

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