The proliferation of publicly traded real estate investment trusts (or REITs) has created access to a global menu of high dividend paying securities. REITs function by generating income from rents and property development that is ultimately passed on to shareholders in the form of dividends.
This creates a highly coveted asset class for income oriented investors to park their capital outside of the traditional methods of stocks and bonds. In addition, accessing these REITs has never been easier through low-cost exchange-traded funds that allow you to hone in on specific sectors, geographies, or broad-based themes.
The largest ETF in the real estate space is the Vanguard REIT ETF (VNQ), which has a whopping $28.8 billion in total assets. VNQ invests in a broad basket of 140 U.S.-listed REITs that include residential, office, hospital, and retail sectors.
One of the most attractive qualities of this fund is its miniscule expense ratio of 0.10%, which ranks among the lowest of its peers. This factor alone has likely been one of the foremost drivers of asset accumulation in VNQ over the last several years.
After a strong run in 2014, VNQ has come under fire this year as interest rate volatility has deflated prices down to the 200-day moving average. This ETF is now 11% off its high and solidly in the red for the year.
The price action in REITs is typically driven by a variety of factors that include the direction of interest rates, real estate prices, and overall stock market momentum. Recently, those factors have coalesced to swing the momentum needle in favor of international REITs versus those domiciled here at home.
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