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Not All REITs (Nor REIT ETFs) Are The Same

Though real estate investment trust (REIT) ETFs experienced outflows in the first half of 2015 in part on concerns about the impact of the Federal Reserve's interest rate policy, there remains more than $51 billion in assets tied to this investment style. The appeal for many investors is the relatively high dividend yields they offer against a backdrop of bond alternatives. However, S&P Capital IQ thinks before choosing among the 33 dedicated ETFs, investors should understand the fundamental drivers.

For example, Vanguard REIT Index ETF (VNQ), a $25 billion ETF, has its greatest exposure in retail REITs (25% of assets), residential REITs (17%) and office REITs (14%); there are also mutual fund share classes for Vanguard REIT Index (VGSLX) and (VGSIX). Meanwhile, the $4.4 billion iShares US Real Estate (IYR) has more in specialized REITs (24%) and less in retail REITs (18%) and residential REITs (14%).

S&P Capital IQ has a positive fundamental view of the retail REIT group, which is comprised of shopping mall operators. Cathy Seifert, an equity analyst for S&P Capital IQ, thinks increasing absorption of retail space should present retail landlords with more pricing power. Most of the retail REITs have long-term leases with their customers, with embedded rent adjustments that should help insulate them from economic fluctuations.

S&P Capital IQ also thinks the fundamentals for the residential and office REITs sub-industries are favorable, thanks to an uptick in demand coupled with a muted increase in supply. For example, Equity Residential (EQR 75 ***) reported 4.1% second quarter revenue growth and margin expansion. S&P Capital IQ forecasts 5% revenue growth with an occupancy rate an above-peers 96%. EQR has a 3.0% dividend yield.

The other major industry for REIT investors to understand is specialized REITs, which is a myriad of companies driven by fundamentals ranging from cell phone towers to pulp and timber, all of which have opted to operate under a REIT structure. The other major industry for REIT investors to understand is specialized REITs, which is a myriad of companies driven by fundamentals ranging from cell phone towers to pulp and timber, all of which have opted to operate under a REIT structure.

VNQ has a 0.12% expense ratio, lower than IYR's 0.45%. Both ETFs trade with a $0.01 bid/ask spread. The REIT ETF with the lowest expense ratio at 0.08% is Schwab US REIT ETF (SCHH); SCHH's largest sub-industry exposure is to retail REITs (26% of assets) and residential REITs (21%).

Please follow me @ToddSPCAPIQ to keep up with the latest ETF Trends.

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