In Lesson 4-3 we discussed different ways to invest in real estate – and we talked about real estate investment trusts (REITs). Rather than buying individual REITs, an option is to buy a REIT ETF or mutual fund. We’ll look at each investment option here.
First, let’s review: A real estate investment trust (REIT) is an entity that acts as an investment agent specializing in real estate and real estate mortgages. Public REITs are usually listed on public stock exchanges and they can be classified as equity, mortgage, or a hybrid (combination of the two).
REITs were created in the U.S. back in the 1950s in order to give individuals the opportunity to invest in large-scale, portfolios of income-producing real estate properties in the same way they were able to access other asset classes – it also helped pool monies for the real estate industry. Since then, the REIT concept has spread around the globe.
Over the past couple of years, a number of ETFs focusing on REITs have been created (see a list below). Each of these has a slightly different approach to the asset class – as they are based on different indexes. The table includes the June 30, 2013, dividend yield, assets under management (AUM), and expense ratio. This is an easy way to own a widely diversified portfolio of REITs at a low cost.
With an ETF, you generally invest in all REITs – the good, bad, and ugly. Conversely, mutual funds seek, through careful investment analysis and diligent research, to own only the good REITs. And while there is a long list of firms that offer REIT mutual funds – let’s open up the hood on one – the Uniplan REIT (http://uniplanic.com/alternative-strategies/reit/).
The graphic below shows information about the fund as of mid-year 2013. You can see the sector allocations, regional mix, and top 10 holdings. This information is available for all mutual fund REITs. Individual research can be done on the various mutual funds (recall Lesson 2-4 and 2-5 on Sources of Information). This analysis allows the individual investor an opportunity to compare the funds, read about the managers’ philosophies, examines their historical track records, and select the fund that most closely aligns with their long-term portfolio goals.