Barclays targets REITs, but timing may not be right

Feb 19, 2007 @ 12:01 am

By David Hoffman

PHILADELPHIA — Real estate investment trusts have outperformed the broad market for seven years, so it isn’t surprising that exchange traded fund providers want in on the action.

Barclays Global Investors of San Francisco has five iShare ETFs in registration that would follow indexes from the National Association of Real Estate Investment Trusts in Washington: the iShares FTSE NAREIT Residential Index Fund, iShare FTSE NAREIT Industrial/Office Index Fund, iShares FTSE NAREIT Retail Index Fund, iShares FTSE NAREIT Mortgage REITs Index Fund and iShares FTSE NAREIT Real Estate 50 Index Fund.

The latter fund would follow an index comprising the 50 largest companies within the FTSE NAREIT Composite Index.

The proposed iShares would join a small number of ETFs that invest in REITs, including the iShares Cohen & Steers Realty Majors Index Fund (ICF), the iShares Dow Jones U.S. Real Estate Index Fund (IYR), the SPDR Dow Jones Wilshire REIT ETF (RWR) from State Street Global Advisors of Boston and the Vanguard REIT Index ETF (VNQ) from The Vanguard Group Inc. of Malvern, Pa.

The latest such ETF is the SPDR Dow Jones Wilshire International Real Estate ETF (RWX), launched Dec. 14.

International appeal

Financial advisers said they like most of the real estate ETFs now in existence — especially the international real estate ETF.

Although the latter fund won’t invest exclusively in REITs — a relatively new investment structure overseas — it gives investors exposure to a broad market to which advisers previously didn’t have easy access, said Rick Miller, chief executive of Sensible Financial Planning and Management LLC of Cambridge, Mass.

As soon as he gets a better understanding of how the product is put together, he said, he likely will be a purchaser of that ETF.

But Mr. Miller isn’t so bullish on the real estate ETFs in the pipeline from Barclays.

The proposed iShares appear to cut up the REIT market a little too much, he said.

“If I wanted a portfolio that had had 100 components, this would be great, but I’m trying to keep the number of funds down,” Mr. Miller said.

He said he prefers ETFs that follow broader indexes — such as the Vanguard REIT ETF or iShares Cohen & Steers Realty Majors.

Other advisers had similar

complaints.

It would take a lot of confidence and specialized knowledge for an adviser to say that mortgage REITs were going to outperform retail REITs, said Jim King, a wealth manager with Balasa Dinverno & Foltz LLC in Itasca, Ill.

“I don’t know too many advisers who would be confident slicing and dicing the industry,” he said.

Because the proposed iShares are in registration, Corin Frost, an investment strategist with Barclays, said he couldn’t comment on them directly. But if an investor has a strong view on a particular sector, having a “targeted approach” enables that investor to more effectively “drive” returns, he said.

Some advisers took issue with the idea that the proposed iShares would slice and dice the market.

The proposed ETFs are nothing like some of the subsector or single-industry ETFs that have been proposed in recent months, said Marvin Appel, chief executive of Appel Asset Management Corp. in Great Neck, N.Y.

The ETFs are based on indexes that allow investors to follow broad “macro trends,” he said.

“I could foresee a pretty straightforward strategy using housing market data to judge, for example, prospects in residential REITs,” Mr. Appel said.

The REIT world is not homogenous, and the ability to have access to broad REIT sectors is a good thing, he said.

“I expect I’ll be using them,” Mr. Appel said about the proposed iShares.

They could prove themselves to be good investments, said Theodore J. Feight, president of Creative Financial Design, a financial advisory firm in Lansing, Mich.

And they are investments he may someday use, he said.

But Mr. Feight questioned the timing — proposing the new iShares when the seven-year bull run in REITs has lasted seven years.

Given that run, it just doesn’t seem like the best time to be investing in REITs, he said.

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