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US Real Estate Investment Trusts (REITs)

 

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REITs are attractive as diversifiers: they tend to have stock-like returns and risk, but are relatively uncorrelated with other asset classes.  For more information about REITs, see here.

There are several very similar investment options available.  Which is best?

The funds are listed in rough order of our overall preference.

Preferences are listed separately for use in retirement accounts and for taxable accounts.

For a listing of our preferences in other asset classes, see here.

Retirement Accounts (i.e., tax-deferred or tax-exempt accounts)

bulletVanguard REIT Index Fund Admiral Shares (VGSLX).  E/R: 0.10%.  There is a minimum initial purchase of $10,000.  This fund tracks the Morgan Stanley REIT index an index of equity REITs.  Its expense ratio is admirably low.

bulletSchwab U.S. REIT ETF (SCHH).  E/R: 0.07%.  This ETF tracks the Dow Jones U.S. Select REIT Index of Equity REITs.  For more information on ETFs, see here.  Our preference for SCHH over VNQ is very small.

bulletVanguard REIT Index Fund ETF Shares (VNQ).  E/R: 0.10%.  This is the ETF share class of the Vanguard REIT Index Fund (VGSIX) below.  For more information on ETFs, see here.

bulletDFA Real Estate Securities Portfolio (DFREX).  E/R: 0.18%.  This fund passively invests in equity and hybrid REITs.  We'd prefer that the hybrid REITs be left out.  But even if they were, this fund's expense ratio is a little high, in our opinion.

bulletVanguard REIT Index Fund (VGSIX).  E/R: 0.24%.  This fund tracks the Morgan Stanley REIT index an index of equity REITs.  Its expense ratio is admirably low.

bulletFidelity Spartan Real Estate Index Fund - Fidelity Advantage Class (FSRVX).  E/R: 0.20%.  Minimum initial purchase: $10,000.  This fund tracks the Dow Jones U.S. Select Real Estate Securities Index of equity REITs and other real estate securities.  The fund charges a short-term redemption fee of 0.75% if you sell shares within 90 days of buying them.  This fee, paid directly to the fund, is intended to discourage market timing.
 
bulletStreetTRACKS Wilshire REIT Fund (RWR).  E/R: 0.25%.  This ETF tracks the Wilshire REIT index of equity REITs.  Its low expense ratio suggests it might be a superior choice to DFREX and TCREX below.  For more information on ETFs, see here.

bulletWilshire US REIT ETF (WREI).  E/R: 0.32%.  This ETF tracks the Wilshire US REIT index of equity REITs.  For more information on ETFs, see here.

bulletiShares Cohen & Steers Realty Majors Index Fund (ICF).  E/R: 0.35%.  This ETF tracks the Cohen & Steers Realty Majors Index of relatively "large and liquid REITs that may benefit from future consolidation and securitization of the U.S. real estate industry."  This fund is quite a bit less diversified than other options in this asset class.  With its relatively high expense ratio and unnecessarily concentrated portfolio, we see little reason to use it instead of the above alternatives.  For more information on ETFs, see here.

bulletiShares FTSE NAREIT Real Estate 50 Fund (FTY).  E/R: 0.48%.  This ETF tracks the FTSE NAREIT Real Estate 50 Index of the 50 largest REITs within the FTSE NAREIT Composite Index.  As an ETF, this fund is expected to be perfectly capital-gains tax efficient.  For more information on ETFs, see here.

bulletiShares Dow Jones U.S. Real Estate Index Fund (IYR).  E/R: 0.47%.  This ETF tracks the Dow Jones U.S. Real Estate Index of companies in the hotel and resort business and REITs that invest in apartments, offices, and retail buildings.  For more information on ETFs, see here.

bulletPIMCO RealEstateRealReturn Strategy Fund Institutional Shares (PRRSX).  E/R: 0.74%.  This is an "enhanced" REIT Index Fund (a.k.a., a "synthetic" index fund).  It buys REIT index derivatives (e.g., futures, swaps, etc.) and invests the remaining cash in TIPS in an attempt to outperform the index.  With its relatively high expense ratio, we see little reason to use it instead of the above less costly (and less actively managed) alternatives.

bulletTIAA-CREF Real Estate Securities Fund (TCREX).  E/R: 0.86%.  This fund passively invests in real estate-related stocks, but principally in REITs.  With its relatively high expense ratio, we see little reason to use it instead of the above alternatives.

Taxable Accounts

Note that REITs should generally not be in taxable accounts, as they are relatively tax-inefficient.

bulletVanguard Variable Annuity REIT Index Subaccount.  E/R: 0.57%.  This variable annuity subaccount tracks the Morgan Stanley REIT index an index of equity REITs.  REITs are, by their very nature, quite tax-inefficient.  You should generally avoid having them in taxable accounts in the first place.  But if you must, it MAY be a good idea to do it inside a non-qualified Variable Annuity (which means it wouldn't really be in a taxable account after all).  For the most part, this recommendation only applies if you already own a variable annuity in general, we don't suggest going out and buying a variable annuity just to invest in this subaccount.  A variable annuity is a VERY long-term investment with relatively little flexibility.  For more info on variable annuities, see the papers and articles here.  Most Variable Annuities are VERY bad deals.

bulletVanguard REIT Index Fund Admiral Shares (VGSLX).  E/R: 0.10%.  There is a minimum initial purchase of $10,000.  This fund tracks the Morgan Stanley REIT index an index of equity REITs.  Its expense ratio is admirably low.

bulletSchwab U.S. REIT ETF (SCHH).  E/R: 0.07%.  This ETF tracks the Dow Jones U.S. Select REIT Index of Equity REITs.  For more information on ETFs, see here.  Our preference for SCHH over VNQ is very small.

bulletVanguard REIT Index Fund ETF Shares (VNQ).  E/R: 0.10%.  This is the ETF share class of the Vanguard REIT Index Fund (VGSIX) below.  However, unlike other non-Vanguard ETFs, this fund will be only as tax efficient as its underlying fund no more and no less.  For more information on ETFs, see here.

bulletDFA Real Estate Securities Portfolio (DFREX).  E/R: 0.18%.  This fund passively invests in equity and hybrid REITs.  We'd prefer that the hybrid REITs be left out.

bulletVanguard REIT Index Fund (VGSIX).  E/R: 0.24%.  This fund tracks the Morgan Stanley REIT index an index of equity REITs.  Its expense ratio is admirably low.

bulletStreetTRACKS Wilshire REIT Fund (RWR).  E/R: 0.25%.  This ETF tracks the Wilshire REIT index of equity REITs.  Its low expense ratio suggests it might be a superior choice to the other options below.  As an ETF, this fund is expected to be perfectly capital-gains tax efficient.  For more information on ETFs, see here.

bulletWilshire US REIT ETF (WREI).  E/R: 0.32%.  This ETF tracks the Wilshire US REIT index of equity REITs.  For more information on ETFs, see here.

bulletiShares Cohen & Steers Realty Majors Index Fund (ICF).  E/R: 0.35%.  This ETF tracks the Cohen & Steers Realty Majors Index of relatively "large and liquid REITs that may benefit from future consolidation and securitization of the U.S. real estate industry."  This fund is quite a bit less diversified than other options in this asset class.  With its relatively high expense ratio and unnecessarily concentrated portfolio, we see little reason to use it instead of the above alternatives.  As an ETF, this fund is expected to be perfectly capital-gains tax efficient.  For more information on ETFs, see here.
 
bulletiShares Dow Jones U.S. Real Estate Index Fund (IYR).  E/R: 0.47%.  This ETF tracks the Dow Jones U.S. Real Estate Index of companies in the hotel and resort business and REITs that invest in apartments, offices, and retail buildings.  With its relatively high expense ratio, we see little reason to use it instead of the above alternatives.  As an ETF, this fund is expected to be perfectly capital gains tax efficient.  For more information on ETFs, see here.
 
bulletiShares FTSE NAREIT Real Estate 50 Fund (FTY).  E/R: 0.48%.  This ETF tracks the FTSE NAREIT Real Estate 50 Index of the 50 largest REITs within the FTSE NAREIT Composite Index.  As an ETF, this fund is expected to be perfectly capital-gains tax efficient.  For more information on ETFs, see here.

bulletFidelity Spartan Real Estate Index Fund - Fidelity Advantage Class (FSRVX).  E/R: 0.20%.  Minimum initial purchase: $10,000.  This fund tracks the Dow Jones U.S. Select Real Estate Securities Index of equity REITs and other real estate securities.  The fund charges a short-term redemption fee of 0.75% if you sell shares within 90 days of buying them.  This fee, paid directly to the fund, is intended to discourage market timing.
 
bulletTIAA-CREF Real Estate Securities Fund (TCREX).  E/R: 0.86%.  This fund passively invests in real estate-related stocks, but principally in REITs.  With its relatively high expense ratio, we see little reason to use it instead of the above alternatives.

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This web page contains the current opinions of Eric E. Haas at the time it is written and such opinions are subject to change without notice.  This web page is intended to serve two purposes:

bulletTo educate the public; and
bulletTo provide disclosure of Mr. Haas' opinions to prospective clients.  We believe that prospective clients are well-served by being made aware of what they are buying and what they are buying is advice that is based on these opinions.

We believe the information provided here to be useful and accurate at the time it is written.  Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. 

No investor should invest solely on the basis of information listed here.  Before investing, it is important to consult each prospective investment's prospectus and consider both its risk/return characteristics and its effect on your overall portfolio.

This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice.  Where specific advice is necessary or appropriate, Altruist recommends consultation with a qualified tax adviser, CPA, financial planner, or investment adviser.  If you would like to discuss the rationale or support for any particular idea expressed on this web page, feel free to contact us.

 

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