REIT ETFs: Beaten by a Dart-Throwing Monkey

Sales of new homes have declined 40.3% decline since May of 2007. Prices of single-family homes in 20 major cities dropped by 15% year-over year, with California and Florida falling 20%+. And few seem to think a "bottom" is in sight.

A dart-throwing monkey would likely have beaten any area associated with real estate in 2007. That might include homebuilders, financial services and/or real estate investment trusts.

The SPDR S&P Homebuilders (XHB) fared the worst, with a 50% drop in '07 alone. The iShares Dow Jones Financial Services Fund (IYG) and the Vanguard REIT Index Fund (VNQ) also fared terribly, with returns approximating -20%.

Indeed, it is interesting to note... REITs seem to have been traveling the same lonely path as financial services. Their fortunes (or lack thereof) seemed dangerously intertwined.

So how one might explain the "decoupling" on the performance for REITs and for "financials" in 2008? Specifically, the Vanguard REIT Index Fund is roughly even on the year and handily outpacing the broader S&P 500 (SPY). In complete contrast, financial services continue to break through lows set in January, March and now June.

There does not seem to be a quick answer to the paradoxical "decoupling." A combination of factors are probably at play, including the perceived safety of the 5%+ yields in REITs. Another possibility is the belief that the credit crunch and bank woes are having a far bigger effect on the consumer/residential real estate market, whereas diversified REIT baskets include entity structures with less trouble getting money for the projects that they are invested in.

Consider health care REITs. They build, own and/or frequently operate medical-office buildings, assisted living facilities and nursing homes. While banks may be choosier about lending money, they are far more willing to provide credit lines to conservatively leveraged entities like health care REITs. Further, funding is rarely a problem when the development of senior housing is able to benefit from government-sponsored Fannie Mae and Freddie Mac.

Note: There are a number health-care REITS, including, but not limited to, Health Care REIT Inc. (HCN), Nationwide Health properties Inc. (NHP) and HCP Inc. (HCP).

Almost any balanced portfolio has a REIT component. But until lately, that component has been little more than a drag.

Today, the Vanguard REIT Index Fund and the Dow Jones Wilshire REIT Fund (RWR) have compelling 5% yields. They may also have the potential for capital appreciation... up and above what the dart-throwing primate may be able to offer.

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