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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?
All of the options discussed here will likely have very similar performance
and will get the job done quite well. You can't go far wrong choosing any
of the options listed here. The funds are listed in rough overall
order of 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)
 | Vanguard REIT Index Fund ETF Shares (VNQ). E/R: 0.15%.
This is the ETF share class of the Vanguard REIT Index Fund (VGSIX) below.
Its internal efficiency should benefit from the cash flows of VGSIX (i.e., it
should have better internal efficiency than other ETFs in this asset class). For
more information on ETFs, see here.
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| Vanguard REIT Index Fund (VGSIX). E/R: 0.26%. This fund
tracks the Morgan Stanley REIT index — an index of equity REITs. Its
expense ratio is admirably low. Our only reservation with this fund is
the 1% redemption fee (payable to the fund, not the managers or anyone else)
if you sell within one year of buying.
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| StreetTRACKS Wilshire REIT Fund (RWR). E/R: 0.26%. 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.
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| Claymore Wilshire US REIT ETF (WREI). E/R: 0.32%. This ETF tracks the Wilshire
US 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.
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| DFA Real Estate Securities Portfolio (DFREX). E/R: 0.33%.
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.
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| TIAA-CREF Real Estate Securities Fund (TCREX). E/R: 0.45%.
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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| iShares 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.
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| iShares 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.
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| iShares Dow Jones U.S. Real Estate Index Fund (IYR). E/R:
0.60%. 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.
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| PIMCO 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.
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Note that REITs should generally not be in taxable accounts, as they are
relatively tax-inefficient.
| Vanguard Variable Annuity REIT Index Subaccount. E/R: 0.6%. 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.
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| Vanguard REIT Index Fund ETF Shares (VNQ). E/R: 0.15%.
This is the ETF share class of the Vanguard REIT Index Fund (VGSIX) below.
Its internal efficiency should benefit from the cash flows of VGSIX (i.e., it
should have better internal efficiency than other ETFs in this asset class).
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.
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| Vanguard REIT Index Fund (VGSIX). E/R: 0.26%. This fund
tracks the Morgan Stanley REIT index — an index of equity REITs. Its
expense ratio is admirably low. Our only reservation with this fund is
the 1% redemption fee (payable to the fund, not the managers or anyone else)
if you sell within one year of buying. The redemption fee limits what
otherwise would be beneficial tax-loss harvesting.
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| StreetTRACKS Wilshire REIT Fund (RWR). E/R: 0.26%. 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.
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| Claymore Wilshire US REIT ETF (WREI). E/R: 0.32%. This ETF tracks the Wilshire
US 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.
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| iShares 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.
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| iShares 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.
|
| DFA Real Estate Securities Portfolio (DFREX). E/R: 0.33%.
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.
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| TIAA-CREF Real Estate Securities Fund (TCREX). E/R: 0.45%.
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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| iShares Dow Jones U.S. Real Estate Index Fund (IYR). E/R:
0.60%. 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. |
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