As real estate investment trusts (REITs) bounce back, their favorable dividend
yields in today's low interest rate environment are attracting some
well-deserved attention. After all, REITs don't pay taxes and must pay out 90%
of their income as dividends. Although some renewed optimism about the economy
has lured a lot of money to REITs, the real estate recovery is still quite
dicey, so REIT exchange-traded funds (ETFs) are worth considering for a little
extra diversification. Fixed-income investors looking for high yields and low
risk have long loved REITs – at least until the dark days of 2007 and 2008,
when the market tanked and investments fell by at least 30%. As the real estate
market claws its way back, investing in a basket of REITs instead of a single
company could be a good way to spread around the risk while taking advantage of
the rewards. That's where ETFs come in. REITs can be an attractive way to get
exposure to the real estate market if you know which company to choose. REIT
ETFs make it easier because you don't have to choose a specific company.
Instead, your investment is diversified across several different REITs (safer if
an individual REIT heads south), and ETFs have the added advantage of trading
like stocks. REIT ETFs also have cost advantages compared to REIT mutual funds,
which can devour dividends with management fees. So if you're desperately
seeking dividends, here are four REIT ETFs that offer attractive yields,
diversified exposure to the real estate market and lower management fees than
REIT mutual funds: Vanguard REIT ETF The Vanguard REIT ETF (AMEX: VNQ ) invests
in stocks of the MSCI REIT Index, which comprises real estate investment trust
stocks. With a market cap of nearly $8.9 billion, the fund has a dividend yield
of 3.49% and a one-year return of about 8%. Top holdings include Simon Property
Group (NYSE: SPG ) and Vornado Realty Trust (NYSE: VNO ). At $56.83, the ETF is
trading more than 18% over its 52-week low of $47.10 in August. SPDR Dow Jones
Wilshire REIT ETF The SPDR DJ Wilshire REIT (AMEX: RWR ) is tied to the Wilshire
REIT Index and aims to invest in all of the REITs in the index in proportion to
their weightings. Top holdings include SPG, VNO, Public Storage (NYSE: PSA ) and
Equity Residential (NYSE: EQR ). With a market cap of nearly $1.4 billion, the
fund has a current dividend yield of 3.6%; its one-year return is 8.4%. At
$63.49, RWR is trading about 18% above its 52-week low of $52.32 in August.
IShares FTSE NAREIT Mortgage Plus Capped Index Fund The IShares FTSE NAREIT
(AMEX: REM ) measures the performance of the residential and commercial mortgage
real estate, mortgage finance and savings associations sectors of the U.S.
equity market, and it tracks the FTSE NAREIT Mortgage Plus Capped Index. Top
holdings include Annaly Capital Management (NYSE: NLY ) and American Capital
Agency (NASDAQ: AGNC ). With a market cap of about $226 million, REM has a
current dividend yield over 11%, and its one-year performance is a - 1.7%. At
about $13, the fund is trading 15% above its 52-week low of $11.28 last month.
Market Vectors Mortgage REIT Income ETF The Market Vectors Mortgage REIT (AMEX:
MORT ) is the new kid on the block, just having started up in August. The fund
seeks to replicate the price and yield performance of the Market Vectors
Mortgage REIT Index. Nearly one-third of the fund's holdings are in NLY and
AGNC; another 18% comprises Chimera Investment Corp. (NYSE: CIM ), Hatteras
Financial (NYSE: HTS ) and MFA Financial (NYSE: MFA ). With a market cap of $5.7
million, MORT has a current dividend yield of nearly 3%. Bottom Line : REIT ETFs
have many benefits for fixed-income investors looking for a decent yield and a
little more exposure to the real estate market. In addition to watching for
another real estate slump that hammers valuations again, investors should keep
an eye on President Obama's Home Affordable Refinance Program (HARP) because a
new round of homeowner refinancings likely would weigh on fund payouts. As of
this writing, Susan J. Aluise did not hold a position in any of the investments
named here.
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