For many investors,
the growth of exchange traded fund (ETF) options has created new opportunities
for portfolio construction and diversification, while at the same time lowering
costs. This holds true in the real estate sector with the continued evolution
of the ETF industry that investors to gain access to the commercial and
residential real estate markets within one single ticker.
For many
investors, real estate is an integral part of a well-diversified portfolio and
offers several distinct advantages.
One key
advantage is that real estate offers a potential hedge against rising inflation
since rents are usually structured to keep pace with inflation. Plus, during
inflationary periods, owning physical property has been beneficial to portfolio
stability. Last, real estate can be a useful non-correlated asset to help round
out portfolio and help smooth out
returns over time.
A second
distinct advantage of real estate ETFs is that it gives an individual investor
the ability to easily participate in real estate investment trusts (REITs).
Real estate ETFs allow individuals to invest in the commercial real estate
market though physical properties or through mortgage investments. REITS were
created in the 1960s as a way to allow individuals to invest at lower amounts,
and because of their structure, investors receive favorable tax considerations
on the distributions.
Combining the
hedging advantage with the tax advantage make real REITs attractive investment
options for a portfolio. But adding in the low cost, liquidity, intraday
pricing, and diversification advantages provide
As with any
investment class, there are risks associated with investing. Rising and falling
interest rates, home values and consumer confidence can play havoc with real
estate returns in the short run. The 2008 housing crisis sent the industry into
a tailspin that is just now showing signs of recovery.
REIT investors
have the opportunity to expand horizons and invest internationally to further
diversify their portfolio options. Currently, the United States only represents
about 30% of the global real estate market. Since the mid-’90s, nearly 30
countries have adopted the REIT tax structure. This has opened up numerous various
markets to global investors and has helped the sector’s market
capitalization expand exponentially. According to FTSE, there are now over 280
international REITs creating an $825 billion global marketplace.
Aside from international
exposure for diversification benefits, investors may also want to expand their
REIT holdings as a hedge against a weakening U.S. dollar. According to industry
group NAREIT, from 1990 to 2009–a time when the U.S. dollar was falling against
the Japanese yen–average total returns for investors were 12.1% per year for
investments in Asian REITs. But,
10.4% of that return was from currency gains and just 1.7% was from the REITs
themselves. Similar results were found in Europe.
As
investors look to diversify portfolios, adding real estate can provide a
stable, inflation-protected source of income while also providing correlation
benefits. Factoring in the low cost of ETFs provides even more advantages for
investors looking to protect their portfolio.