Real Estate ETF’s

I want to invest in Real Estate but the Real Estate market in my country en region is very expensive and does not give decent returns. A Real Estate ETF offers an alternative. Which one to choose? Which Real Estate indexes exist and which one is the best proxy for the market?

My questions

• What are the most representative Real Estate Indexes? If I had to pick one for US REITs and one for worldwide REITs, which ones to pick?
• What are the ETF’s tracking those indexes?
• Which ETF would I personally purchase to keep for a very long time?

Index classification

An ETF tracks an index so wich indexes exist?

Region

There are indexes for various countries and continents. Real Estate companies and stocks are well represented in the USA and have the best long-term track record there compared to other continents. World-wide indexes contain half of their holdings in the US, unless it is a specific ‘Exclude – US’ or ’emerging market’ index.

Developed and emerging

Indexes also classify to ‘developed’ and ’emerging’ markets and investments.

Long-term historical returns

You can find the numbers here so I won’t repeat them. See also my other post on expected returns here. The take-away is this:

• Real Estate in the USA seems to do better than the rest of the world
• Emerging markets are not better than developed markets although you would expect more ‘growth’ there
• With a long-term investment horizon, you would be best to invest in the US or world-wide (global ETF’s often implicitly have half of their  investments in the USA).

The quest for the Real Estate reference index

The problem to look for a reference Real Estate Index can be explained by this example:

first, look at the top – 4 of largest Equity (stock, non-Real Estate) ETFs worldwide. Note that this is not my personal selection, it is simply the four largest of the world (January 2019):

ETF Name	Index
SPDR S&P 500 ETF	S &P 500
iShares Core S&P 500 ETF	S &P 500
Vanguard Total Stock Market Exchange Traded Fund	CRSP US Total Market Index
Vanguard S&P 500 ETF	S &P 500

Now do your best and try to discover a representative index for the stock market using the table above! Is your answer S & P 500? Well done!

And now the same exercise for the 10 largest Real Estate ETF’s world-wide:

ETF	Index
Vanguard Real Estate Index Fund	MSCI US REIT
iShares Cohen & Steers REIT	Cohen & Steers Realty Majors
Vanguard Global ex-U.S. Real Estate	S&P Global Ex US Property NR USD
Schwab U.S. REIT ETF	Dow Jones U.S. Select REIT Index
iShares US Real Estate ETF	Dow Jones U.S. Real Estate Index
SPDR Dow Jones REIT	Dow Jones Wilshire REIT Index (ticker: DWRTFT)
iShares Developed Markets Property Yield UCITS	FTSE EPRA/NAREIT Developed Dividend+
Real Estate Select Sector SPDR Fund	S&P Real Estate Select Sector TR
SPDR DJ Wilshire International Real Estate	Dow Jones Global ex-U.S. Select Real Estate Securities TR Index
SPDR Dow Jones Global Real Estate	Dow Jones Global Real Estate

What’s your answer now? You don’t see one single index which occurs more than once? Me neither! It seems that there is not one single representative in RE, not even a few ones like in equities (I can name a few in equities: S&P 500, NASDAQ, NIKKEI 225, STOXX 50 or STOXX 600, Dow Jones Industrials, …).

The Big Mess

When you start to dig a bit deeper in the world of Real Estate indexes and trackers, the confusion only increases. You will find out that:

• There seems to be an index for every ETF. It appears as the ETF principle has been turned upside down: instead of an index with a long historical track record (like the S & P 500) which is then tracked by one or more ETF’s (like Vanguard S&P 500 ETF), in the Real Estate word, fund managers seem to invent an ETF, and then define an index around it.
• An index like FTSE is really a family of indexes. And when you research one member, they give you a lot of info but sometimes they don’t mention about which ETF they are actually talking. And then they made variations on family members: a copy with ‘Excluding US’, a copy with ‘Developed only dividend +’, etc.
  
• Sometimes the data provided about an ETF is including dividends, sometimes not, but they often just neglect to tell you because they think it’s so obvious (that a dividend is excluded, or that a dividend is included)
• Accumulation means that dividends are kept in the ETF. ‘Net Return’ means (most of the time) that a dividend is included but a tax regime is implied (up to you to find out which one, good luck because sometimes it is a weighted mix of tax regimes!), while ‘Total Return’ means the dividend is included without taxes. You are lucky if they tell you. If they don’t tell anything like that, you are invited to guess. Most frequently but not always this implies that the ETF which tracks this index pays out the dividends and these dividends are not included in the index or ETF return numbers. 
• And you have ‘Net Total Return’. Which means a bit of everything: you receive dividends but not all of it, dividend taxes are withheld and hopefully these are the appropriate taxes for your country.
• One single ETF can exists in multible dividend distributing versions. One concrete example IWDP/DPYE has a USD distributing version, Euro Hedged accumulating, USD accumulating, a EUR distribution, and GBP Distributing Hedged
  
• These indexes track REITs, but a REIT sometimes includes or excludes mortgage REITs, or mortgage brokers or bankers, or commercial and residential real estate brokers, home builders, large landowners, hybrid REITs etc. You are lucky if they tell you.
  
• Some indexes are developed market, other emerging market, other global market, and sometimes they call it one thing and implicitly mean another.
  
• And on top of that, for most indexes you cannot find historical data. Or you have a chart to show you the most recent one or two years of data (out of the 30 years that the index exists !). Too bad for you if you want more than the chart shows. Or if you want exact numbers instead of a thick line on the chart. Or more details than the 5 and 10 years return only. Or they don’t give you the actual numbers, but a recalculated number assuming that you start from 100.
• Or they compare your ETF with another index which is not tracked by your ETF to show you the ETF performance. Or they compare your ETF which is distributing (dividends excluded) with the performance of a total return index (dividends included). See here.
  
• And then you have currencies… and ETF’s in EURO which track an index in USD and vice versa. And ETF’s in USD which have a notation on European stock exchanges in EURO. And so on..

It is one big mess, and you can surf days on the interwebs only to become more and more confused. Instead of the relevant data which you want, they throw a bunch of nonsense to you: the name of the fund manager, the sustainability rating, the rating according to some agency, the volatility… No wonder that 99.9 % of the people are financial illiterate. Who wants to spend days researching this?

Let’s assemble a list

Let me assemble a list with:

• the largest Real Estate ETF’s (the top-10 list above) and
• completed with the most popular ETF’s which can be purchased in Europe. Because… in Europe we cannot purchase the best, cheapest, largest ETF’s, because European regulators have ‘protected’ us (read: prohibited it) by their new ruling ‘MIFID II’. See also a previous post.
• Note: this is far from the complete list of Real state ETF’s, which contains hundreds of ETF’s. It is only the largest both worldwide and the largest available in Europe.
  

Index	ETF	ETF Ticker	Country	MIFID II	Size (Billion)
MSCI US REIT	Vanguard Real Estate Index Fund	VNQ	USA	N	28
Cohen & Steers Realty Majors	iShares Cohen & Steers REIT	ICF	USA	N	7.5
S&P Global Ex US Property NR USD	Vanguard Global ex-U.S. Real Estate	VNQI	Global ex-US	N	6.5
Dow Jones U.S. Select REIT Index	Schwab U.S. REIT ETF	SCHH	USA	N	4.5
Dow Jones U.S. Real Estate Index	iShares US Real Estate ETF	IYR	USA	N	3.4
Dow Jones Wilshire REIT Index (ticker: DWRTFT)	SPDR Dow Jones REIT	RWR	USA	N	2.5
FTSE EPRA/NAREIT Developed Dividend+	iShares Developed Markets Property Yield UCITS	IWDP	Developed World	Y	2.5
S&P Real Estate Select Sector TR	Real Estate Select Sector SPDR Fund	XLRE	USA	N	2.5
Dow Jones Global ex-U.S. Select Real Estate Securities TR Index	SPDR DJ Wilshire International Real Estate	RWX	Global Ex US	N	2.3
Dow Jones Global Real Estate	SPDR Dow Jones Global Real Estate	RWO - SPYJ	Global	N	2
FTSE EPRA Nareit Global REITs NR	iShares Global REIT	REET	Global	N	1.3
FTSE EPRA/NAREIT Developed Europe ex UK Dividend	iShares European Property Yield UCITS	IPRP	Developed Europe ex UK	Y	1.2
FTSE Nareit Equity REITs TR USD	iShares Core U.S. REIT ETF	USRT	USA	N	0.9
MSCI Real Estate Index	Fidelity MSCI Real Estate Index	FREL	USA	N	0.6
FTSE EPRA Nareit Global Index	AMUNDI INDEX FTSE EPRA NAREIT GLOBAL UCITS ETF DR	IEPRA.PA	Global (but larger REITs)	Y	0.5
FTSE EPRA/NAREIT Developed Europe index	Xtrackers FTSE EPRA/NAREIT Developed Europe Real Estate UCITS	D5BK	Europe	Y	0.4
FTSE EPRA/NAREIT Eurozone Capped index	BNP Paribas Easy FTSE EPRA/NAREIT Eurozone Capped UCITS	EEA	Europe	Y	0.34
FTSE NAREIT All Residential Capped Index	iShares Residential Real Estate ETF	REZ	USA	N	0.32
FTSE EPRA/NAREIT Developed index	HSBC FTSE EPRA/NAREIT Developed UCITS	HPRD	Global Developed	Y	0.13
FTSE EPRA Nareit Developed Europe NR	iShares Europe Developed Real Estate	IFEU	Europe	N	0.03
S&P Select Sector Capped 20% Real Estate (Net Total Return)	Invesco US Real Estate Sector UCITS	XRES	USA	N	0.01

The MIFID II column indicates if the ETF can be purchased in Europe according to the new MIFID II regulation.

The reference

Back to the original question: which index can serve as a reference for the Real Estate market? Using the table above, and filtering out “USA only” ETFs, filtering out “Europe only” ETFs, and filtering out “global ex USA” (because the US is still a large part of the REIT market), I get 5  global ETF’s.

The largest one is “iShares Developed Markets Property Yield UCITS”, tracking the index “FTSE EPRA/NAREIT Developed Dividend +”.

What is today’s price level for Real Estate ETF’s?

This is the price chart for the EUR distributing version IWDP.AS aka “FTSE EPRA/NAREIT Developed Dividend +”:

So at the end of 2018 we are probably at fairly correct price levels. The price index has a very-long term return of 4 % but this is very dependent on inflation and interest levels. When interest rates rise, Real Estate ETFs go down. Which is why RE ETFs have gone slightly down since 2015 while the stock market went up.

Obviously we get a very big dividend return, either in cash (Distributing ETF) or added to the ETF price (Accumulating). Dividend yield at present (end of 2018) is 3.8%. It’s the basic operating modus of a REIT: own a piece of Real Estate, collect rent, pay it out as dividend to the shareholders.

Total Returns (Gross) in the past were around 10 % (higher dividend yields and higher price growth, higher inflation). In the future, we can TR expect to be around 7.5 % rather than 10 %.

Which ETF to buy?

For my personal portfolio, I make this selection:

• World-wide exposure, which limits my list to five.
• Filtering on ‘Can be purchased in Europe’ and ‘Accumulating’ I am down to two.
• Selecting the one with the lowest TER (Total Expense Rate) gives me one single ETF:

“AMUNDI INDEX FTSE EPRA NAREIT GLOBAL UCITS ETF DR”. It tracks the “FTSE EPRA Nareit Global Index” which is a popular index for global REITs. 

This is my personal pick for long-term investing in REITs. Your best choice  can be different, depending on your tax regime, country exposure, or personal preference.

Links

Investopedia

Net returns and how they are calculated

The reference: iShares Developed Markets Property Yield UCITSE