U.S. stock markets have seen a rocky start to 2015. Global growth worries, a host of chilling U.S. economic data in a snow-capped Q1, lukewarm corporate earnings on stronger dollar and oil price volatility led to ups and downs in the U.S. benchmark indices.

To top it all, the Fed’s March meeting showed signs of a delayed rate hike as the central bank looks for more definite signs of improvement in the economy. As a result, yields on the benchmark 10-year treasury notes have mostly remained below 2% this year (read: REIT ETFs for Income and Diversification).

In this kind of an environment, only a few sectors can deliver investors with smart capital gains as well as dividend yields. REIT is one of them. A growing economy and a low interest rate environment is a golden opportunity for REITs.  

This is especially true as this space is required to distribute at least 90% of its annual taxable income to shareholders annually in the form of dividends. Thus, a low interest rate environment brightens the lure of high yields delivered by REITs and vice versa.

Most REIT ETFs are in green so far this year (as of April 23, 2015). Hence, investors might be interested to play the sector, but they should be doing so with better performing funds. Notably, investors often notice inequality in the level of returns from the same industry players.

Below we have highlighted two popular REIT funds and have tried to find out which one could be the better bet going forward if investors go for a REIT investment  (read: A Comprehensive Guide to REIT ETFs).

iShares U.S. Real Estate ETF (IYR)
 
Launched in 2000, IYR follows the Dow Jones U.S. Real Estate Index that measures the performance of the real estate industry of the U.S. equity market. The fund comprises 113 stocks with top holdings including Simon Property Group, American Tower and Crown Castle International. No stock accounts for more than 7% of the fund thus entailing moderate company specific concentration risks. The fund’s expense ratio is 0.43% (see all Real Estate ETFs here).

The fund has amassed about $5.4 billion so far and trades in massive volumes of 10.5 million shares thus resulting in tight bid/ask spread and low trading costs. Capitalization-wise, the fund invests about 46% of its assets into large cap stocks followed by 33% exposure in mid-cap stocks.

The fund is up 2.2% so far this year (as of April 23, 2015) and yields about 3.49% (as of the same date). The fund has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Vanguard REIT ETF (VNQ)
 
The fund, launched in 2004, seeks investment results by tracking the performance of the benchmark – MSCI US REIT Index – which is used to gauge real estate stocks. The fund consists of 141 stocks. Simon Property takes the top spot with 8.5% holding while Public Storage comes as the distant second with about 4% exposure. Health Care REIT is the third holding with 3.7% of the basket.

It charges 10 bps in fees. Capitalization wise, the fund puts about 43% focus in large cap stocks trailed by mid caps with around 30% focus. VNQ is even bigger in size. In fact, it is the biggest ETF with over $27 billion in market capitalization.

The fund trades in volumes over 4 million shares a day. The fund is up 2.1% (as of April 23, 2015) and yields about 3.64% as of the same date. The fund has a Zacks ETF Rank #3 with a moderate risk outlook.
 

Bottom Line

Both the above-mentioned choices are almost same in structure. However, investors should note that Vanguard is known for its low cost offerings. This low cost probably gives VNQ an edge over its iShares’ product in terms of assets (read: Fidelity Plans New REIT ETF).
 
Plus, more liquidity associated with the Vanguard ETF results in tighter bid/ask spread and lower trading costs compared to the iShares ETF. Apart from this issue, the funds have behaved almost in the same fashion, returning and yielding roughly in line.