Mon, 6 Nov 2017
For diversification or income, we like Vanguard REIT Index, T. Rowe Price Real Estate, and Cohen & Steers Realty Shares.
Jeremy Glaser: Many investors turn to dedicated real estate funds, either to add a dose of diversification or if they are looking for income. We asked our fund analysts to highlight three of their favorites.
Alex Bryan: Vanguard REIT Index is the cheapest and one of the best diversified real estate funds available. It invests in U.S.-listed equity REITs of all sizes and weights them based on market capitalization. Now, real estate investment trusts are firms that own property and collect rent. They are legally required to distribute at least 90% of their income. As a result, this particular fund has a dividend yield of over 4%. But REITs do come with considerable interest-rate risk. Rising interest rates can make it more expensive to buy property, which can reduce property values. Higher rates can also increase REITs' interest expense which leaves less cash available for shareholder distributions. If you're comfortable with this risk, Vanguard REIT Index is a really strong option. It offers a durable cost advantage with an expense ratio of just 12 basis points. This helped it beat its category average by about 89 basis points per year over the last 10 years and should continue to give it an edge against its peer group over the long term.
David Kathman: T. Rowe Price Real Estate is one of our top picks in the real estate category. It's got a very experienced manager, David Lee, who has been in place for 20 years, and he uses a very disciplined strategy that's based on the fundamentals of the underlying real estate. Sometimes that doesn't work very well relative to other real estate funds when cheaper REITs are doing well, which has been the case in much of the past few years. But over the long run, the fund has achieved very strong returns. On top of all that, it's one of the cheapest actively managed funds in the category.
Alec Lucas: Cohen & Steers Realty Shares is the flagship strategy of the first U.S. investment company to focus on listed real estate. Despite having one of the biggest asset bases in its Morningstar domestic real estate category, the fund has posted competitive results over trailing periods of three years or more. That's a credit to a strong management team. Since 2012, the fund has been headed up by Thomas Bohjalian. The firm has considerable resources within the real estate space. It includes economist Michael Penn, who helps the team develop macroeconomic assumptions. That combined with careful research devoted to real estate market fundamentals leads them to invest in about 40 to 60 real estate stocks that keep the portfolio diversified by property type and geography. The fund has reasonable fees. If you are interested in an actively managed offering, it's definitely one to consider.