Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some real estate stocks to your portfolio, the First Trust S&P REIT Index ETF (FRI 0.23%) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.
The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The First Trust ETF's expense ratio -- its annual fee -- is a relatively low 0.50%. It recently yielded about 2.1%
This ETF has performed rather well, beating the world market over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
With a low turnover rate of 9%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.
Why real estate?
Perhaps because there's a finite amount of it, real estate tends to increase in value over time, though not always in a straight line. Real estate investment trusts (REITs), meanwhile, offer an extra benefit via their requirement to pay out at least 90% of their income in the form of dividends.
More than a handful of real estate companies had strong performances over the past year. Realty Income (O 1.12%), for example, surged 25%, and yields an attractive 5%. It's a retail REIT, leasing property to retailers and aiming to lock in long-term income through long leases. The company has been investing in growing its property portfolio, and its occupancy rate has been rising as well. It's also a dividend star, upping its payout 70 times since going public in 1994. Its most recent increase was a whopping 19.2%. Recent acquisitions include American Realty Capital Trust. Trading near its 52-week high, it's not a screaming bargain right now.
Health Care REIT (HCN +0.24%) gained 16% and recently yielded about 4.9%, also hitting a 52-week high. Management has explained in a conference call that "[o]ur business model continues to hit on all cylinders." Earlier this year, the company acquired Sunrise Senior Living, boosting its elder-care facility portfolio. Meanwhile, same-store margins and occupancy rates have been growing. Obamacare will boost the number of people receiving medical care, which should help REITs such as this one that focus on health-care properties. The company's average annual revenue growth has topped 25% over the past five years.
Other companies didn't do as well last year, but could see their fortunes change in the coming years. Digital Realty Trust (DLR +0.00%) advanced 9%, as investors excited about the growth in cloud computing grabbed shares of this company that focuses on data-center properties. It's geographically diversified, too, with properties in the U.S., Europe, and Asia. Its dividend recently yielded 4.2%. After its last quarter, management noted, "While slow economic growth in the U.S. and abroad has delayed the decision-making process of many enterprise customers... we are very optimistic about the growth prospects and the near- and long-term outlook for our business. In fact, we are on the offensive, taking advantage of our strong balance sheet and financial resources to continue to both expand our portfolio through new development leasing and to be the consolidator in the industry consistently making accretive investments of strategic data center portfolios and individual properties."
UDR (UDR 0.40%) shed 1%, and recently yielded 3.6%. Formerly known as United Dominion Realty Trust and specializing in mid-market apartment complexes, some of its properties in and near New York City were damaged by Hurricane Sandy. In its last quarterly conference call, management noted "strong organic rent growth as well as slightly higher occupancy rates."
The big picture
Demand for real estate isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
