Options Are Improving for Real Estate ETFs

Investors studying the quartet will also see many other stock names repeated, primarily because there are still very few REITs available for the indices to track. According to the National Association of Real Estate Investment Trusts, or NAREIT, the aggregate market cap for the roughly 150 publicly traded equity REITs is around $260 billion. That's less than the market cap for Dow component Microsoft (MSFT Quote).

The disparities between the ETFs become more apparent once you move beyond the contents of the baskets and start focusing on their construction. The ICF, for instance, is a fairly concentrated 30-stock portfolio whose top 10 holdings account for 57% of its assets.

Meanwhile, at the other end of the spectrum is Vanguard's VNQ. It tracks the Morgan Stanley REIT Index, which comprises 121 stocks. The top 10 stocks account for just 34% of its total portfolio.

Stuck in the middle, the RWR and the IYR hold 92 and 81 stocks, respectively, with top-10 concentrations of 38% and 35% of assets.

Due to its concentration, the ICF bested competing index ETFs in 2004 by returning 34.5%. That's 2 percentage points better than the RWR and 4 points better than the IYR. Vanguard introduced its real estate ETF in late 2004.

Nevertheless, as Ron DeLegge, editor of ETFguide.com, points out, "When REITs run their course, it's likely the ICF could suffer the most due to its heavy concentration of assets."

Dividend yield, often a prime consideration for those looking to invest in REIT funds, also differs widely among the funds, ranging from 4% for the ICF to 5% for the RWR.

Finally, the four ETFs differ greatly when it comes to cost. As might be expected, the Vanguard offering, VNQ, is the lowest-priced ETF, with an expense ratio of 0.18% of fund assets. That's barely a quarter of the cost of the IYR, which is the most expensive at 0.60%. The RWR and ICF charge 0.28% and 0.35%, respectively.

Options are available on the IYR and the ICF only.