The FTSE NAREIT Residential Index Fund Is Crushing The Real Estate ETF Competition (REZ, VNQ, IYR)

Eric Dutram: With a weak consumer economy and a lack of job creation, concerns are once again beginning to return to the housing industry. For the 10 City Case-Shiller index, prices are down year-over-year in non seasonally adjusted terms for the most recent reading, leading to a dreaded double dip for many markets around the country. However, this doesn’t give investors the full picture of the real estate market in the country, as a number of other corners of the space have help up rather well in comparison. Stocks in some corners of the retail space, as well as those in the storage and medical sectors, have managed to do rather well in these difficult times and have given investors both solid gains and nice dividend yields.

So, while overall the sector may still be facing some headwinds, most funds in the Real Estate ETFdb Category have performed rather well so far in 2011 thanks to these outperforming sectors. In fact, over the 18 ETFs in the space, 13 have outperformed the S&P 500 in a year-to-date comparison, suggesting that the vast majority of products are giving investors a better performance from a capital gain perspective– not to mention yield– than a simple investment in the S&P 500. With that being said, some funds have certainly outperformed others in the time frame, none of which have done better than the iShares FTSE NAREIT Residential Index Fund (NYSE:REZ).

REZ has managed to produce a 9.8% gain for investors so far in 2011, thoroughly trouncing the market and beating out far more popular funds as well. For example, the two most popular products in the space, (NYSE:VNQ) and (NYSE:IYR), are producing returns of 0.65% and -1.4%, respectively, on a year-to-date basis for their investors. While both of these products do provide investors with slightly better yields than REZ, they obviously do not come close from a performance standpoint, either this year or from longer term periods as well. In fact, when looking at the previous three years, REZ is the top performer in the category, gaining 16.5% while VNQ gained slightly (up 1.6%), and IYR lost a bit (down 3.7%) in comparison [read Time For A Real Estate ETF?].

Why REZ?

In fact, in IYR, the second biggest holding goes to industrial and office while nearly 21% goes to retail and another 8% goes to mortgages. Given the broad weakness in the retail economy and slumping home prices, these corners have likely weighed down IYR more than most in 2011. Meanwhile, for top dog VNQ, the story is similar; retail makes up 25% while office and industrial combine to make up just about another quarter as well [see more holdings of REZ here].

In essence, REZ can be thought of more as a ‘defensive’ play in the sector as the fund has more exposure to corners of the market that tend to do the same no matter what– such as health care– and ones that can often outperform when home prices are slumping, such as apartments and storage. Additionally, given the high levels of exposure in the other two funds to hard hit sectors such as retail and mortgages, it shouldn’t be surprising to see that they have underperformed REZ by a wide margin so far in 2011 and in recent history as well.

Lesson Learned

This goes to show investors that just because a number of ETFs track the same industry, it doesn’t mean they can’t do it in very different ways. All of the real estate ETFs currently offered give investors slightly different exposure, offering varying tilts to corners of the real estate market. It is crucial to do extra digging and take a look at the underlying holdings to make sure they match up with an investment thesis, otherwise investors may be disappointed with the results, as some undoubtedly are with their current real estate ETF holdings [also read Believe It Or Not: American Real Estate ETFs Crushing International Counterparts].

Written By Eric Dutram From ETF Database Disclosure: No positions at time of writing.

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