If you’ve been wanting to buy a house of your own but aren’t yet ready to take the leap onto the property ladder, perhaps owning a real estate ETF is a better option for you. You won’t have to worry about renovations or estate agents, and the market is much more liquid, allowing you to get in and out of your investments with relative ease.
Investing in the real estate market using ETFs can be a highly desirable option for many kinds of investors, explains Morningstar ETF analyst Gordon Rose.
“Property ETFs offer investors exposure to a traditionally illiquid asset class that has historically exhibited stock-like returns and bond-like income streams,” says Rose. “However, investors should be aware that direct property investments behave quite differently from investments via real estate funds; meaning that funds tend to have high correlations to stock markets and thereby limited diversification benefits for a portfolio. Nevertheless, real estate funds offer a few advantages for investors compared to a direct property investment. For example, no mortgage or maintenance are required [and you’ll have] improved liquidity versus direct investment.”
Morningstar currently covers a handful of property ETFs for UK investors. The total expense ratios for the ETFs range between 0.4% and 0.6%. The following short descriptions for each ETF were taken from our analysts’ research notes, which are available to Premium members.
iShares FTSE EPRA/NAREIT Developed Property Yield ETF (IWDP)
This ETF provides exposure to real estate investment trusts (REITs) and listed real estate companies in developed economies (excluding Greece). Over the past decade, the fund’s benchmark index has shown a high degree of correlation to international stock markets, so investors should be aware that diversification benefits appear limited. It’s important to note that the index currently allocates nearly 50% of its value to the US. REITs tend to provide a consistent dividend yield for shareholders, making an investment specifically appealing for income-seeking investors. As of early March 2012, the fund was paying a dividend of 3.0% compared to a trailing 3-year average of 5.6%.
iShares FTSE EPRA/NAREIT Asia Property Yield ETF (IASP)
This ETF provides investors with exposure to listed real estate companies and REITs in developed Asian countries. The index is also highly correlated to international stock markets, meaning it’s not ideal as a diversification tool. The ETF is perhaps most suitable for investors with a favourable outlook for the Asian real estate market, and Hong Kong in particular as the index allocates 43% of its value to real estate-related equities in the city-state. As of early March 2012, the ETF paid a 3.5% dividend compared to a trailing 3-year average of 3.9%.
iShares FTSE EPRA/NAREIT UK Property Yield ETF (IUKP)
This ETF provides exposure to REITS and listed real estate companies in the UK. It is only moderately correlated to international stock markets over the past decade and therefore might offer some degree of diversification within a broader equity portfolio. (The index correlated 64% with the FTSE 100 Index and 66% with the MSCI World Index over the last ten years. However, the degree of correlation has increased significantly over the past three years.) REITs can be used either as a core holding or as a tactical call to tilt the investor’s real property exposure to a certain part of the real estate market. Therefore, the ETF is perhaps most suitable for investors with a favourable outlook for the UK real estate market. For tactical purposes, the ETF can be deployed to overweight the UK in the belief of a particularly strong future for the UK property market. As of early March 2012, this fund’s dividend yield was 3.1%, compared to a trailing 3-year average of 3.5%.
iShares FTSE/EPRA European Property Ex-UK ETF (IPRP)
This ETF provides exposure to listed real estate companies and REITs in developed European countries, but excludes the UK market. It is moderately correlated to international stock markets and allocates 42% of its value to French firms. As of early March 2012, the dividend yield was 3.8% compared to its trailing 3-year average of 3.4%.
iShares FTSE EPRA/NAREIT US Property Yield ETF (IQQ7)
This ETF provides exposure to REITs and listed real estate companies in the US and is highly correlated to international markets. As of early March, the ETF’s dividend yield was 2.9% compared to a trailing 3-year average of 3.9%.
