Currently, the recovering economy is supporting the REIT sector. The residential real estate market has turned around and commercial real estate prices are also rising. As the economy produces more jobs, we are seeing rising rents and improving occupancy levels.
“Since 2007, REITs have taken advantage of low interest rates and refinanced their debts,” Woodham added. “Many have rock-solid balance sheets and improving cash flow.”
However, a rising interest rate environment could weigh on REIT investments, especially companies that have not refinanced to take advantage of low rates.
Potential investors should know that REIT dividends are mostly taxed as income. Firms will pass on the majority of earnings, along with the tax liability, to shareholders.
There are a number of REITs-related ETFs.
The Vanguard REIT ETF tracks the MSCI US REIT Index, which includes a broad range of REITs companies, except mortgage REITs. VNQ has a 3.37% 12-month yield and a 0.10% expense ratio.
The fund has 121 holdings and the top ten make up 42.3% of the overall portfolio. Top holdings include Simon Property 10.7%, Public Storage 4.7%, HCP 4.6%, Ventas 4.3% and Equity Residential 4.1%.
Sub-sector allocations include diversified REITs 7.4%, industrial REITs 5.0%, Office REITs 13.8%, Residential REITs 16.2%, Retail REITs 26.7% and Specialized REITs 30.8%.
The iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) tries to reflect the performance of the Dow Jones U.S. Real Estate Index, which includes real estate companies and REITs. IYR has a 3.52% 12-month yield and a 0.46% expense ratio.
The ETF has 95 holdings and the top ten make up 39.2% of the overall portfolio. Top holdings include Simon Property 8.6%, American Tower 5.1%, HCP 3.8%, Ventas 3.7% and Public Storage 3.7%.
Sub-sector allocations include specialty REITs 29.7%, retail REITs 20.5%, industrial REITs 18.0%, residential REITs 12.2%, mortgage REITs 8.7%, hotel & lodging REITs 4.5%, real estate services 2.7%, real estate holdings 1.9% and diversified REITs 1.4%.
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