Real Estate Index Funds: Characteristics and Performance Evaluation

Abstract

This paper examines operating characteristics, risk and performance measures of all available vehicles for index investing in U.S. real estate funds during the ten-year period from April, 1999, to March, 2009. The authors of this study find real estate index mutual funds and exchange-traded funds exhibit lower Expense Ratios, lower Turnover Rates, and mostly lower Tax Cost Ratios than category averages. As newcomers, real estate exchange-traded funds have had a good start, with the lowest Expense Ratios, lowest Turnover Rates, and lowest Tax Cost Ratios. Vanguard’s four index mutual funds over the past ten years have outperformed their counterpart category averages with higher Returns, higher Risks, and higher Risk-Adjusted Returns. On the contrary, Wells’ four index mutual funds over the past ten years have underperformed their counterpart category averages with lower Returns, higher Risks, and mostly lower Risk-Adjusted Returns. Four ETFs with at least three-year track record, however, have collectively underperformed index mutual funds over the past five with lower Returns, mostly higher Risks, and mostly lower Risk-Adjusted Returns. Nonetheless, Vanguard’s ETF has been able to mostly outperform Vanguard’s index mutual funds with higher Returns, lower (or same) Risks, and higher (or same) Risk-Adjusted Returns since its inception.