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Asset Class Scoreboard Entering The Final Quarter

We’re entering the final quarter of 2015, and if we take the sports analogy a little further – it’s time for the star of your portfolio to show up if there’s any hope of winning the game. Because no matter the make up of your team in 2015, you’re likely losing through three quarters, with every asset class besides bonds and cash in the red and in need of a 4th quarter comeback. As for alternatives – managed futures are just barely in the red, but red nonetheless, while hedge funds are down for the year, but better than stocks themselves. (Disclaimer: Past performance is not necessarily indicative of future results) Notes: No asset class has been up double digits at any point on the year. Commodities are down by more than -20% for the year. World stocks are down about -17% from their 2015 highs (ouch). World stocks have had five consecutive months of negative returns (Hedge Funds 4). Bonds are at the top of the scoreboard only up 1.01%. For as many articles there have been about the end of the bull market, U.S. stocks are only down -31% on the year. We’re seeing less articles about hedge funds underperforming stocks (because they’re beating them!). Finally, a look at how each asset class performed YTD of every month in 2015 thus far. (click to enlarge) (Disclaimer: past performance is not necessarily indicative of future results.) Source: All ETF performance data from Morningstar.com Sources: Managed Futures = Newedge CTA Index, Cash = 13 week T-Bill rate, Bonds = Vanguard Total Bond Market ETF (NYSEARCA: BND ), Hedge Funds = IQ Hedge Multi-Strategy (NYSEARCA: QAI ) Commodities = iShares GSCI ETF (NYSEARCA: GSG ); Real Estate = iShares DJ Real Estate ETF (NYSEARCA: IYR ); World Stocks = iShares MSCI ACWI ex US Index Fund ETF (NASDAQ: ACWX ); US Stocks = SPDR S&P 500 ETF (NYSEARCA: SPY ) Share this article with a colleague

Which U.S. REIT ETF Has The Best Dividend Growth?

Summary REIT ETFs have attracted investor interest in the prevailing low interest rate environment. This article studies the dividend growth history of four U.S. REIT ETFs. Data are analyzed to identify the REIT ETF with the highest yield, the highest dividend growth rate and the highest “Chowder number”. Introduction The current low-interest rate environment has stimulated interest in income-generating securities such as real estate investment trusts [REITs]. Investors uncomfortable with picking individual stocks may prefer to invest in REIT ETFs. The Vanguard REIT Index Fund (NYSEARCA: VNQ ) is the largest REIT ETF, with over $25B in assets. Besides providing a relatively high yield, REITs can also grow their distributions. This article seeks to compare the dividend growth history of five U.S. REIT ETFs to determine which fund has the best dividend growth characteristics. The funds The funds chosen were VNQ, the iShares U.S. Real Estate ETF (NYSEARCA: IYR ), the iShares Cohen & Steers REIT ETF (NYSEARCA: ICF ), the KBW Premium Yield Equity REIT Portfolio (NYSEARCA: KBWY ) and the IQ US Real Estate Small Cap ETF (NYSEARCA: ROOF ). VNQ, IYR and ICF were chosen as these were the three largest REIT ETFs by assets under management [AUM]. KBWY and ROOF were chosen as these represented small/mid-cap REIT ETFs. Note that ROOF also contains some exposure to mortgage REITs [mREITs] such as New Residential Investment Corp (NYSE: NRZ ), which is currently its top holding. Details for the five REIT ETFs are shown in the table below (data from Morningstar ).   VNQ IYR ICF KBWY ROOF Yield [ttm] 3.86% 3.69% 3.20% 5.21% 5.18% Expense ratio 0.12% 0.45% 0.35% 0.35% 0.69% Inception Sep 2004 Jun 2000 Jan 2001 Dec 2010 June 2011 Assets $25.9B $4.43B $3.20B $113M $92.6M Avg Vol. 4.0M 10.2M 333K 23.7K 22.3K No. holdings 144 115 30 30 68 Avg. Cap $8.8B $11.6B $17.6B $1.8B $1.5B Annual turnover 8% 21% 8% 27% 17% Morningstar rating *** *** ** ***** ***** As can be seen from the chart above, VNQ, IYR and ICF are very large REIT funds, with billions of dollars in AUM. By comparison, KBWY and ROOF are much smaller, with around $100 million in assets. Additionally, the average market capitalization of VNQ, IYR and ICF range from $8.8B to $17.6B, while KBWY and ROOF, being mid/small-cap REIT ETFs, have much smaller average market capitalizations of $1.8B and $1.5B, respectively. In terms of expense ratio, VNQ is the cheapest at 0.12% while ROOF is the most expensive at 0.69%. Finally, KBWY has the highest yield of 5.21%, while ICF has the lowest yield of 3.20%. Dividend grow th history Only three of the funds in this study, VNQ, IYR and ICF, existed before the financial crisis in 2008-2009. Moreover, all three funds cut their distributions in the recession. Therefore, only the last six years of dividend history will be considered. Year-on-year dividend growth The following chart shows the year-on-year dividend growth for the five funds since 2011. Since only the first two quarters of dividends of 2015 have been declared thus far, the dividend growth % shown for “2015” actually represents the growth of the dividend from the previous 8th to 5th quarters (i.e. 2013 H2 + 2014 H1) to the last 4 quarters (i.e. 2014 H2 + 2015 H1). The same calculation applies to the other years in the chart. The chart above shows that the distribution history for ROOF is extremely lumpy, with a 65% increase in distribution for 2014, followed by a -27% decrease in distribution for 2015. Hence, ROOF was removed from subsequent analysis so that the differences between the other four funds can be more clearly observed. The following chart is the same as the previous one, but with ROOF removed. The chart above shows that all of the ETFs have had quite robust dividend growth over the past 5 years. 3 or 5-year average dividend growth For further comparison, I have computed the average year-on-year dividend growth percentages for each of the funds over either the past 3 or 5 years. We can see from the chart above that VNQ has had the highest dividend growth over both 3-year and 5-year periods, with average year-on-year dividend growth rates of 12.2% and 10.7%, respectively. KBWY had the lowest average 3-year dividend increase of 7.04%. Another way to compare dividend growth rates is the cumulative increase in dividend. The following chart shows the cumulative 3-year and 5-year annualized dividend growth rates of the four funds. Presenting the data in this way shows a similar story. VNQ still has the highest annualized cumulative 3-year and 5-year dividend growth rates of 12.2% and 10.7%, respectively. Chowder numbers The ” Chowder number ” is determined by adding the current yield of a security to the historical dividend growth rate. The Chowder number can be considered as a proxy for the expected total return of a security, assuming that the dividend yield of the asset stays the same. The following chart shows the Chowder numbers of the four funds using the annualized 3-year DGR. We can see from the chart above that VNQ has the highest Chowder number of 16.0%, while IYR has the lowest Chowder number of 11.20%. This suggests that going forward, VNQ might be the best investment from the total return perspective. However, one caveat is that, Chowder numbers are backward-looking and one could question whether or not dividend growth rates of REIT ETFs can be reliably extrapolated into the future. Performance The following chart shows the total return performances for VNQ, IYR and ICF over the past 5 years. The data shows that all three REIT ETFs move closely together, with VNQ leading the pack at 83.6% (12.9% annualized). The following chart shows the total return profiles for the four REIT ETFs over the past 3 years. We see that KBWY has had the best 3-year total return of 40.3% (11.9% annualized), followed by VNQ at 32.7% (9.9% annualized). IYR had the worst performance over both 3-year and 5-year periods. Conclusion This article explored the dividend growth history of three large-cap U.S. REIT ETFs, namely VNQ, IYR and ICF, as well as the mid/small-cap REIT ETF KBWY. However, the “best” REIT ETF may depend on each investor’s personal preference. Looking for the highest dividend growth rate? VNQ had the highest annualized 3-year and 5-year dividend growth rates of 12.1% and 10.7%, respectively. Looking for the highest current yield? KBWY has the highest current yield of 5.21%. Looking for the highest “Chowder number”? Using 3-year dividend growth rates, VNQ has the highest “Chowder number” of 16.0% (3.9% yield + 12.1% DGR). Looking for the best past performance? KBWY had the best total return performance (40.3%) over the past 3 years out of the four REIT ETFs, while VNQ had the best total return performance (83.6%) over the past 5 years out of VNQ, IYR and ICF. Interestingly, the “winner” of each of these categories was either VNQ or KBWY. Another reason to pick VNQ is its cheap expense ratio of 0.12%, which is the lowest out of the four funds. VNQ’s combination of 3.9% yield and 12.1% 3-year dividend growth rate makes this fund my top pick for a U.S. large-cap REIT ETF. On the other hand, KBWY provides exposure to the mid/small-cap segment of U.S. REITs, which offers diversification benefits as well as the potential for higher returns (accompanied by higher volatility). I would pick KBWY over ROOF due to KBWY’s lack of mREIT exposure as well as its more consistent dividend history. Additionally, KBWY pays monthly, which could be a plus for some investors, whereas all of the other REIT funds pay quarterly. Finally, the prevailing worries over interest rate rises has caused the REIT ETFs to drop by about 10% from their recent highs, providing more attractive entry points to income investors. VNQ Total Return Price data by YCharts Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) 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.