ETFs for Real Estate Investment Trusts (REITs)

While investors have jumped into real estate investment trusts and exchange traded funds to cash in on the attractive yields, REITs prices have edged higher, causing some to take pause from a valuation standpoint.

The MSCI U.S. REIT Index has gained an average 19% per year over the past three years, including dividends, reports Tom Lauricella for the Wall Street Journal.

“U.S. REITs look less attractive to us now than they have over the last 10 years,” Richard Levine, one of the portfolio managers of the Neuberger Berman Equity Income Fund, said in the article. “As people have looked for the next source of yield they’ve found REITs, so they’ve done nicely. But that’s been pushing valuations to levels which are unattractive in some cases.”

REITs operate a range of real estate properties, such as hotels, hospitals, apartments and storage units, among others. To receive favorable taxes, REIT companies are required to distribute 90% of their taxable income to share holders, which is why REITs provide such attractive yields. [Mortgage REIT ETFs Fighting the Fed]

The asset class is typically valued in comparing prices to adjusted funds from operation, or AFFO, a type of net-income use for real estate. According to Green Street Advisors, REITs are trading at 18 times their stock prices using a three-year forward AFFO, compared to an average of 15 times since 1998.