Real Estate Investment Trusts
Another hot sector this year has been real estate investment trusts. Stabilizing interest rates and strong housing data has renewed support for this income generating asset class. The largest ETF in this space is the Vanguard REIT ETF (VNQ) which invests in a broad portfolio of 132 commercial, residential and specialty REITs. So far this year, VNQ has increased in value nearly 12%.
While that performance is certainly excellent, one sub-sector has posted even stronger returns in 2014. The iShares Residential Real Estate Capped ETF (REZ) focuses on a narrow portfolio of 35 REITs in residential and specialty units. REZ has gained nearly 15% this year and currently has a 30-day SEC yield of 3.70%. This targeted exposure has clearly been of benefit to enhance the returns above a broad-based benchmark.
The last alternative income solution that warrants a mention is preferred stocks. I have owned the iShares Preferred Stock ETF (PFF) for myself and my income clients for some time now. This fund is easily the largest in its class with over $9 billion in total assets and a yield of 5.80%. One attractive feature of this sector is that income is paid monthly to shareholders. So far this year, PFF has jumped nearly 8% after catching a tailwind from falling long-term interest rates.
Another option to consider in this arena is the MarketVectors Preferred Securities ex Financials ETF (PFXF). This ETF holds a unique mix of preferred stocks of non-financial companies which is largely centered on REITs, utilities, and telecommunications sectors. In 2014, PFXF has gained 9.6% and also offers a slightly higher yield of 6.15%.
Similar to REZ, this fund benefits from more focused exposure to a subset of the preferred stock universe that has outperformed a broader index. A fund like this may be more suitable as a tactical opportunity rather than a core holding, but certainly merits a close look for monthly income seekers.
At the time of publication the author had positions in VNQ and PFF.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.