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Background Information
In this article, I provide a short and succinct review of the iShares U.S. Real Estate ETF (IYR). I will lay out the major characteristics that I screen for and at the end, provide some comparison between IYR and several of its peers in the U.S. real estate ETF universe. As a passive index ETF investor, I am generally only concerned with the following ETF characteristics:
- Age of the fund (inception date)
- Distributions: frequency, amount, yield, and taxability
- Net Assets
- Liquidity (as measured by the average daily trading volume)
- Expense ratio
- Performance relative to the associated index and the fund’s peers
- Nature, composition, and number of holdings
This ETF analysis will focus on these seven broad characteristics and conclude with recommendations and suggestions for including this fund in a well-diversified portfolio. As you will see below, I found IYR to be an acceptable ETF for investors seeking exposure to the U.S. real estate asset class.
Fund Information, Inception, and Net Assets
IYR holds stocks of real estate companies and REITs and is designed to track the Dow Jones U.S. Real Estate Index. As the fund’s name implies, this ETF holds only U.S.-based securities. The fund is almost 19 years old, having been established on June 12, 2000.
A quick search of the real estate ETF universe (courtesy of ETFdb.com) shows that among each fund with total assets over $1 billion (including global funds), IYR ranks the 4th largest out of twelve with total assets of $4.366 billion:
Distributions
IYR pays distributions quarterly in March, June, September, and December. As shown in the “Distributions” chart below from the fund’s website, IYR has paid steady dividends for the past eight quarters, none of which were classified as return of capital:
The trailing four quarters of dividends distributed per share totaled $2.63. Based on IYR’s closing price from the most recent trading day, the distribution yield is 3.07%. IYR’s yield ranks 26th out of the real estate ETFs from the ETFdb.com screener. The highest yield honor among this group goes to another iShares fund: REM (iShares Mortgage Real Estate ETF), with a yield of 8.75%.
Liquidity and Expense Ratio
A quick review of IYR’s data on Yahoo! Finance shows that this fund trades an average of almost 9 million shares per day, indicating sufficient market liquidity for this ETF. In terms of the expense ratio, IYR posts a figure of 0.43% per the fund’s website, making its expense ratio 16th lowest out of the screener’s real estate ETFs.
For investors seeking an even lower expense ratio from a U.S. real estate index ETF you may want to consider (ETF name and expense ratio shown in parenthesis):
- SCHH (Schwab U.S. REIT, 0.07%), USRT (iShares Core U.S. REIT, 0.08%), and VNQ (Vanguard Real Estate Index, 0.12%). I will note that SCHH only has 96 holdings, much less than both USRT and VNQ. However, its size is in line with IYR but it also manages a similar amount of holdings at a lower cost. (Note: See below under “Holdings” for a discussion of this.)
Returns
IYR’s returns are perhaps its greatest descriptive statistic among those that I reviewed today. As shown below, IYR finishes 5th among real estate ETFs with a cumulative 5-year return of 50.48%!
On an annualized basis, the fund’s website shows returns only slightly below the benchmark index. This is reasonable considering the fact that the ETF is not actively-traded for excess return but must still pay management expenses and trading fees:
When compared to five of the other largest real ETFs by net assets, IYR’s one-year returns correspond to the average return of the group (shown below):
The best return in the group goes to ICF (iShares Cohen & Steers REIT) with a one-year gain of 18.2%, while the lowest belongs to USRT at 12.8% (about 1% below the average one-year returns of the group).
Holdings
IYR’s portfolio contains 115 holdings, including major REITs Simon Property Group (SPG), Crown Castle (CCI), and Prologis (PLD). The leader of the group, VNQ, has 186 holdings, followed by USRT (160), FRI (First Trust S&P REIT Index, 157), PPTY (U.S. Diversified Real Estate, 116), and then IYR.
Two last qualitative screens
Before making a purchase decision, I always look at the equity’s chart to get a feel for price movements and where the current price is compared to long-term trends. I also review the most recent financial report to determine the level of a fund’s assets and liabilities and the effectiveness of its operations.
To begin with price, below is the price chart for IYR’s entire trading history (courtesy of Yahoo! Finance):
As you can see, IYR’s price climbed steadily to a peak in February 2007, which was just at the start of the subprime mortgage crisis. As the crisis developed, IYR’s price dropped into the mid-$20s during 2009 and has been steadily increasing ever since. As of today, the ETF trades at about $84.32/share, which is within about $10 of the highest price that it has ever commanded.
To make a final purchase decision, I will generally review the one-month, three-month, and six-month charts. These charts are not included because they all mostly echo what is shown above, with IYR consistently gaining in price. For this reason, if deciding to add a position in this fund, I would recommend adding to your position over a period of days (for me, generally over a period of 15-30 days, which is easy to do using Folio’s dollar-based trading platform).
Finally, IYR’s financials. The most recent report available from the fund’s website is the 2018 Semi-Annual Report (dated Sep. 30, 2018). Each major section of the report related to IYR is summarized below.
Fund Summary
The stated annualized expense ratio of 0.42% ties directly to the 0.43% figure on the fund’s website. Of note, almost 1/3 of the portfolio’s sector allocation is invested in Specialized REITs, followed by Retail REITs and Residential REITs at about 13% each.
Schedule of Investments
As stated on the fund’s website, IYR’s holding consist almost exclusively of REITs. It does hold a position in CSGP (CoStar Group, Inc.), a company providing analytics and information for commercial real estate, as well as cash positions in two BlackRock money market funds. The holdings are exactly as they should be and I do not see anything to be concerned about.
Statement of Assets and Liabilities
IYR’s balance sheet shows $4.627 billion in assets, $4.373 billion of which represent investments in securities. A comparatively insignificant total liabilities figure of $234 million results in net assets of almost $4.4 billion, also directly in line with the figure provided on the fund’s website.
On the income statement, the fund earned $66 million of investment income for the six month period of the report. Less investment advisory fees of around $8 million, IYR sits at a net six-month profit of almost $58 million, keeping about $0.88 for every $1 of revenue that it receives.
Finally, I also like to review the Statement of Changes in Net Assets to determine the source of a business’s cash. For the six-month period in question, most of IYR’s cash came from fund purchases by investors, followed by increases from the fund’s net income from the income statement. Notably, as of this point, IYR has distributed $22.6 million of funds in excess of its net investment income over the period. However, if you assume that income will remain similar over the next six months, this excess distribution should be resolved by income earned before the fiscal year ends (which it already has, on March 31, 2019). To verify this, I consulted the next (and last) financial report for IYR: Financial Highlights. In the first column on the left, I see that IYR began the six month period with a NAV of $75.48. Despite the excess distributions previously mentioned, IYR still managed to grow its NAV to $80.13 by the end of the period, indicating that they are effectively managing their shareholder distributions.
Summary
IYR is a large and relatively well-established U.S. real estate index ETF. Despite a higher expense ratio than similar funds, IYR pays a comparable level of distributions, is highly liquid and trades frequently, maintains a slightly lower amount of portfolio holdings than other funds, reports returns comparable to other funds, and has what appears to be a solid balance sheet and consistent, efficient investing operations. While IYR may not be the most efficient or largest ETF in this space, it is definitely a safe buy and will provide you exposure to U.S. real estate.
Author note: Personally, I selected USRT for my own investment portfolio because of the efficiency with which it manages its large portfolio, its level of net assets, and the comparable level of returns to other U.S. real estate ETFs. After performing this analysis, hypothetically, I would be willing to substitute USRT for IYR in my own portfolio.
Disclosure: I am/we are long USRT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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