What is REIT ETFs?

What is REIT ETFs?


Just what REIT?

A REIT, or Real Estate Investment Trust, is a business that owns or finances income-producing real estate. Modeled after shared funds, REITs provide investors of all types regular income channels, diversification and long-term capital appreciation. REITs typically pay out all their taxable income as dividends to shareholders. In turn, shareholders pay the taxes on those dividends.

REITs allow anyone to invest in portfolios of large-scale properties exactly the same way they invest in other industries – through the buy of stock. In the same way shareholders benefit by having stocks in other corporations, the stockholders of a REIT earn a share of the income produced through investment – without actually having to go out and buy or even finance property.

Most REITs are traded on major stock trades, but there are also public non-listed and private REITs. Both main types of REITs are Equity REITs and Mortgage REITs. Equity REITs generate profits through the collection of rent on, and from sales associated with, the properties they own for the long-term. Mortgage REITs purchase mortgages or mortgage securities tied to commercial and/or residential qualities.

Today, REITs are tied to almost all aspects of the actual economy, including apartments, hospitals, hotels, industrial facilities, infrastructure, nursing houses, offices, shopping malls, storage centers, student housing, and timberlands. REIT-owned properties can be found in every state and according to an E&Y study, support approximately 1. 8 million U. S. jobs annually. U. S. REITs have become a model for REITs all over the world, and now more than 35 countries around the world possess adopted REIT legislation.

After the close of trade on August. 31, 2016, Equity REITs and other listed real estate companies were transferred in the Financials Sector of the Global Industry Classification Standard (GICS) to some new Real Estate Sector. The change reflected the growing need for the real estate sector, and is expected to create a bigger and more diverse investor base for the REIT industry. Mortgage REITs remained inside the Financials Sector.

reit etfs

To qualify as a REIT a company should:

Invest at least 75 percent of its total assets in property
Derive at least 75 percent of its gross income through rents from real property, interest on mortgages financing real property or from sales of property
Pay at least 90 percent of its taxable income as shareholder dividends each year
Be an entity that is taxable like a corporation
Be managed by a board of directors or trustees
Have no less than 100 shareholders
Have no more than 50 percent of it’s shares held by five or fewer individuals

REITs offer investors numerous benefits, including:

Diversification: Over the long term, Equity REIT returns show little correlation to the returns of the broader stock marketplace.
Dividends: Stock exchange-listed REITs have provided a stable income flow to investors.
Liquidity: Stock exchange-listed REIT shares can be very easily bought and sold.
Performance: Over most long-term horizons, stock exchange-listed REIT results outperformed the S&P 500, Dow Jones Industrials and NASDAQ Amalgamated.
Transparency: Stock exchange-listed REITs operate under the same rules because other public companies for securities regulatory and financial reporting reasons.

What is ETF(Exchange-traded fund)

An exchange-traded fund (ETF) is a good investment fund traded on stock exchanges, much like stocks. An ETF holds assets for example stocks, commodities, or bonds, and trades close to its net asset value during the period of the trading day. Most ETFs track an index, such like a stock index or bond index. ETFs may be attractive as investments for their low costs, tax efficiency, and stock-like features. By 2013, ETFs were typically the most popular type of exchange-traded product.

Only authorized participants, large broker-dealers who’ve entered into agreements with the ETF’s distributor, actually buy or sell shares of the ETF directly from or to the ETF, and then just in creation units, which are large blocks of tens of a large number of ETF shares, usually exchanged in-kind with baskets of the fundamental securities. Authorized participants may wish to invest in the ETF shares for that long-term, but they usually act as market makers on the actual open market, using their ability to exchange creation units using their underlying securities to provide liquidity of the ETF shares and help make sure that their intraday market price approximates the net asset value from the underlying assets. Other investors, such as individuals using a list broker, trade ETF shares on this secondary market.

An ETF combines the valuation feature of the mutual fund or unit investment trust, which can be bought or sold at the conclusion of each trading day for its net asset value, using the tradability feature of a closed-end fund, which trades throughout the trading day at prices which may be more or less than its net asset value. Closed-end funds are not regarded as ETFs, even though they are funds and are traded with an exchange. ETFs have been available in the US since 1993 as well as in Europe since 1999. ETFs traditionally have been index money, but in 2008 the U. S. Securities and Exchange Commission started to authorize the creation of actively managed ETFs.

ETFs offer each tax efficiency and lower transaction costs. More than two trillion dollars have been invested in ETFs since they were first introduced in the usa in 1993. By the end of 2015, ETFs offered “1, eight hundred different products, covering almost every conceivable market sector, niche as well as trading strategy”.
Structure of ETFs
An ETF is a kind of fund, some entity that owns assets (bonds, stocks, precious metal bars, etc. )#) and divides ownership of itself into shares which are held by shareholders. The details of the structure (like a corporation or trust) will vary by country, and even within one country there might be multiple possible structures. The shareholders indirectly own the assets from the fund, and they will typically get an annual report. Shareholders have entitlement to a share of the profits, such as interest or returns, and they may get a residual value in case the actual fund is liquidated. Their ownership interest in the fund can certainly be bought and sold.

ETFs are similar in many methods to traditional mutual funds, except that shares in an ETF can be purchased and sold throughout the day like stocks on a stock market through a broker-dealer. Unlike traditional mutual funds, ETFs do not really sell or redeem their individual shares at net asset worth (NAV). Instead, financial institutions purchase and redeem ETF shares directly in the ETF, but only in large blocks (such as 50, 000 gives), called creation units. Purchases and redemptions of the creation units generally have been in kind, with the institutional investor contributing or receiving a basket of securities from the same type and proportion held by the ETF, although some ETFs may require or permit a purchasing or redeeming shareholder to substitute cash for some or all the securities in the basket of assets.

The ability to purchase and redeem creation units gives ETFs an arbitrage mechanism meant to minimize the potential deviation between the market price and the web asset value of ETF shares. Existing ETFs have transparent portfolios, so institutional investors will know exactly what portfolio assets they must assemble if they would like to purchase a creation unit, and the exchange disseminates the updated net asset value from the shares throughout the trading day, typically at 15-second intervals.

When there is strong investor demand for an ETF, its share price will temporarily go above its net asset value per share, giving arbitrageurs an incentive to purchase additional creation units from the ETF and sell the component ETF shares on view market. The additional supply of ETF shares reduces the selling price per share, generally eliminating the premium over net asset worth. A similar process applies when there is weak demand to have an ETF: its shares trade at a discount from net resource value.
In the United States, most ETFs are structured as open-end management investment companies (exactly the same structure used by mutual funds and money market funds), although several ETFs, including some of the largest ones, are structured because unit investment trusts. ETFs structured as open-end funds have greater flexibility in constructing a portfolio and therefore are not prohibited from participating in securities lending programs or through using futures and options in achieving their investment objectives.

Below existing regulations, a new ETF must receive an order in the Securities and Exchange Commission (SEC), giving it respite from provisions of the Investment Company Act of 1940 that wouldn’t otherwise allow the ETF structure. In 2008, the SEC proposed rules that would allow the creation of ETFs with no need for exceptive orders. Under the SEC proposal, an ETF will be defined as a registered open-end management investment company that:

1) Issues (or redeems) creation units as a swap for the deposit (or delivery) of basket assets the present value of which is disseminated per share by a national securities exchange at regular intervals throughout the trading day
2) Identifies itself as an ETF in a sales literature
3) issues shares that are approved for listing and trading on the securities exchange
4) Discloses each business day on its publicly available site the prior business day’s net asset value and closing selling price of the fund’s shares, and the premium or discount from the closing market price against the net asset value of the fund’s shares like a percentage of net asset value
5) Either is a good index fund, or discloses each business day on its publicly available site the identities and weighting of the component securities and other assets held through the fund
The SEC rule proposal would allow ETFs either to become index funds or to be fully transparent actively managed money. Historically, all ETFs in the United States had been catalog funds. [citation needed] In 2008, however, the SEC began issuing exemptive orders to completely transparent actively managed ETFs. The first such order was in order to PowerShares Actively Managed Exchange-Traded Fund Trust, and the first actively managed ETF in the usa was the Bear Stearns Current Yield Fund, a short-term income fund that began trading about the American Stock Exchange under the symbol YYY on March twenty five, 2008. The SEC rule proposal indicates that the SEC may nevertheless consider future applications for exemptive orders for actively managed ETFs that not satisfy the proposed rule’s transparency requirements.

Some ETFs commit primarily in commodities or commodity-based instruments, such as crude oil and gold and silver. Although these commodity ETFs are similar in practice to ETFs that purchase securities, they are not investment companies under the Investment Organization Act of 1940.

Publicly traded grantor trusts, such as Merrill Lynch’s HOLDRs investments, are sometimes considered to be ETFs, although they lack most of the characteristics of other ETFs. Investors in a grantor trust possess a direct interest in the underlying basket of securities, which doesn’t change except to reflect corporate actions such as stock divides and mergers. Funds of this type are not investment companies underneath the Investment Company Act of 1940.

As of 2009, there had been approximately 1, 500 exchange-traded funds traded on US exchanges. This particular count uses the wider definition of ETF, including HOLDRs as well as closed-end funds.

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