The REIT ETF Skew Paid Off

chart01.pngIn the world of REITs, there’s no ETF that tops Vanguard REIT ETF (VNQ) in size. With more than 150 holdings, VNQ is the largest in size of its kind and has approximately $31 billion in assets under management. However, being big doesn’t mean you have better returns, although the expense ratio tends to be lower. iShares Residential Real Estate Capped ETF (REZ), which has almost a half billion in AUM, has consistently topped VNQ.

VNQ tracks the MSCI US REIT index and broadly invest in US REITs, both large and mid-sized cap stocks, without a particular sector base. On the other hand, REZ tracks the FTSE NAREIT All Residential Capped Index and is partial to apartment stocks, even though its major holding is the self-storage REIT, Public Storage, with a 12% exposure.

Except for year to date, there’s never been a period of time in which REZ didn’t top VNQ. Over the last five years, REZ’s total returns have been higher than VNQ’s.


5-year return: 74% vs. 63%

3-year return: 41% vs. 34%

1-year return: 15% vs. 11%

YTD return: 4% vs. 6%

In regards to residential stocks, REZ has a diversified selection with holdings that include main representatives in multifamily, single family, and manufactured homes, as well as student housing.

Perhaps REZ’s secret lies in the fact they are not limited to apartment stocks. Although almost half of the portfolio is invested in residential REITs, REZ has major exposure to REITs in self-storage and healthcare. In fact, when looking over their portfolio stocks, it basically includes holdings from these three sectors almost without distinction. For instance, all publicly traded self-storage REITs are part of the portfolio.

What spooks me is the fact that among its holdings there are overvalued REITs (self-storage and large cap apartments), alongside the more reasonably priced stocks in healthcare. Having an edge has certainly helped so far, but it might become increasingly more difficult over the next few years.

Source: iShares, Vanguard,

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

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