[Real Estate Exchange Traded Fund]

Master of Business Economics [M.B.E] Semester III

By
Saloni Bastawala - 03 Ankita Jain - 13 Urvisha Mistry Dolly Taylor - 21 - 41

Supervising Teacher

[Kiran Mam]

DEPARTMENT OF ECONOMICS
VEER NARMAD SOUTH GUJARAT UNIVERSITY SURAT 395 007 [September- 2010]
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REAL ESTATE EXCHANGE TRADED FUNDS

Real Estate ETF's are a new investment vehicle that has gained popularity in recent years as way to gain exposure to the property sector. Real Estate exchange traded funds are constructed to track a property index or a basket of property related stocks. ETF's have grown in popularity, particularly the US as investors seek alternative ways to invest.

What Does REIT ETF Mean? Exchange-traded funds that invest the majority of assets in equity REIT securities and related derivatives. REIT ETFs are passively managed around an index of publicly traded real estate owners; indexes may vary from provider to provider but two popular benchmarks are the MSCI U.S. REIT Index and the Dow Jones U.S. REIT Index, both of which cover about two-thirds of the aggregate value of the publicly-traded REIT market domestically. REIT ETFs are characterized by their above-average dividend yields. REIT stands for Real Estate Investment Trust. REITs pay the minimal or no corporate income taxes. However, they have to distribute almost 90% of their income to the investors. REIT functions similar to mutual funds, their difference being in the context of the underlying assets. Due to the high rate of dividends, REIT ETFs comprise characteristics of both equities as well as fixed income investments. Though the dividends have to be disbursed regularly, their value increases or decreases as per the market.

How Do REIT ETF Work? REIT ETFs invest in REIT companies and create a fund. REIT ETFs stocks are then marketed on the indices and traded like stocks.

Advantages of REIT ETFs With most of the countries focusing on infrastructural development, REIT ETFs are in huge demand. Their advantages are:

REIT ETFs have a higher investment performance and a better yield. REIT ETFs offer unparalleled diversification. As per the modern theories, diversification in different assets is important for minimizing risks. REIT ETFs have high liquidity and thus can be easily traded throughout the day for compounding margins. REIT ETFs offer inflation hedging. With inflation around, investors turn towards real estate and invest in it. As the demand increases, so does the price of the RIET ETF.

Disadvantages of REIT ETFs

Here are some of the disadvantages of REIT ETF:

REIT ETFs can cause huge losses if the entire focus of the ETF is limited to one segment of the real estate business. REIT ETFs can cause losses even when the investments are made in an area that already has a lot of real estate activity.

REIT ETFs have a diversified portfolio ranging from commercial mortgages to construction. Therefore, an investor must go through the details before selecting the REIT ETF

Here is a list of real estate ETFs traded in the US.

iShares Cohen & Steers Realty Major Index (ICF): This real estate ETF invests in an index that represents large and liquid real estate investment trusts (REITs) as represented by the Cohen and Steers Realty Major Index. iShares Dow Jones U.S. Real Estate Index Fund (IYR): This ETF invests in an index that measures the performance of the Real Estate industry of the U.S Equity market, and has 75 holdings. Its three largest holdings are Simon Property Group at 8.34%, Public Storage at 4.91% and Annaly Capital Management IN at 4.8% (as on Sep 07 2009). iShares FTSE NAREIT Industrial / Office Capped Index Fund (FIO): This real estate market tracks an index that represents the industrial and office real estate sector of the U.S. equity market. It has 26 holdings, with Boston Properties PLC being the biggest holding at around 14.57% of the whole fund (as on Sep 07 2009). iShares FTSE NAREIT Mortgage Plus Capped Index Fund (REM): This ETF tracks an index which measures the performance of the real estate, mortgage finance, and savings association sector of the US equity market. Its largest holding is at Annaly Capital Management IN at 22.18% (as on Sep 07 2009). iShares FTSE NAREIT Real Estate 50 Index Fund (FTY): This ETF is comprised of the 50 largest REIT companies within the FTSE NAREIT composite index. iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ): REZ tracks residential real estate, healthcare and self storage sectors of the US equity market. iShares FTSE NAREIT Retail Capped Index Fund (RTL): This ETF tracks the retail property real estate sector of the U.S equity market. Its largest holding is Simon Property Group Inc at 22.51% (as on Sep 07 2009). SPDR Dow Jones Global Real Estate ETF (RWO): RWO gives a global exposure to real estate stocks, with 244 holdings in 25 countries. SPDR Dow Jones International Real Estate ETF (RWX): This real estate ETF provides exposure to real estate stocks from around the world, except for the US. SPDR Dow Jones REIT ETF (RWR): This ETF gives exposure to the domestic REIT market. Claymore / AlphaShares China Real Estate ETF (TAO): This is a Chinese real estate ETF, which gives you exposure to REITs and companies in China that are open to foreign ownership, and derive the majority of their revenue through the real estate sector. Vanguard REIT ETF (VNQ): VNQ tracks an index of stocks that are issued by U.S. equity real estate investment trusts. First Trust S&P REIT Index Fund (FRI): The underlying index of this real estate ETF measures the investable U.S. REIT market.
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Vanguard REIT ETF

The Vanguard REIT ETF is an exchange-traded share class of Vanguard REIT Index Fund, which employs a "passive management" - or indexing - investment approach designed to track the performance of the MSCI US REIT Index, a benchmark of U.S. property trusts that covers about two-thirds of the value of the entire U.S. REIT market. The fund intends to remain at least 98% invested in REIT stocks; the remaining assets will be in cash investments to maintain liquidity for shareholder redemptions. In seeking to match the index, the advisor does not try to predict or profit from changes in the direction of the REIT market. The fund's cash holding will result in small differences between the returns of the fund and those of the MSCI US REIT Index. Investment type: ETF (Exchange-Traded Fund); listed on the U.S. NYSE exchange Ticker symbol: VNQ Fund manager: Vanguard Group, Inc.

Product summary

Invests in stocks issued by real estate investment trusts (REITs), companies that purchase office buildings, hotels, and other real property. Goal is to closely track the return of the MSCI US REIT Index, a gauge of real estate stocks. Offers high potential for investment income and some growth; share value rises and falls more sharply than that of funds holding bonds. Appropriate for helping diversify the risks of stocks and bonds in a portfolio.

Investment Objective
The Fund seeks to provide a high level of income and moderate long-term capital appreciation by tracking the performance of a benchmark index that measures the performance of publicly traded equity REITs.

Fees and Expenses

The following tables describe the fees and expenses you may pay if you buy and hold ETF Shares of the Fund.

Shareholder Fees
(Fees paid directly from your investment) Transaction Fee on Purchases and Sales None through Vanguard (Broker fees vary) None through Vanguard (Broker fees vary) Up to $50 through Vanguard (Broker may impose an additional fee)

Transaction Fee on Reinvested Dividends

Exchange Fee on Conversion to ETF Shares

Annual Fund Operating Expenses

(Expenses that you pay each year as a percentage of the value of your investment)

Management Expenses 12b-1 Distribution Fee Other Expenses Total Annual Fund Operating Expenses

0.09% None 0.04% 0.13%

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Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, affect the Funds performance. During the most recent fiscal year, the Funds portfolio turnover rate was 16% of the average value of its portfolio.

Primary Investment Strategies

The Fund employs a passive managementor indexinginvestment approach designed to track the performance of the MSCI US REIT Index. The Index is composed of stocks of publicly traded equity real estate investment trusts (known as REITs). The Fund attempts to replicate the Index by investing all, or substantially all, of its assets in the stocks that make up the Index, holding each stock in approximately the same proportion as its weighting in the Index.

Primary Risks
An investment in the Fund could lose money over short or even long periods. You should expect the Funds share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Funds performance could be hurt by: Industry concentration risk, which is the chance that the stocks of REITs will decline because of adverse developments affecting the real estate industry and real property values. Because the Fund concentrates its assets in REIT stocks, industry concentration risk is high. Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. The Funds target index may, at times, become focused in stocks of a limited number of companies. Because the Fund seeks to track its target index, the Fund may underperform the overall stock market. Interest rate risk, which is the chance that REIT stock prices overall will decline because of rising interest rates. Interest rate risk should be high for the Fund. Investment style risk, which is the chance that the returns from REIT stockswhich typically are small- or mid-capitalization stockswill trail returns from the overall stock market.
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Historically, these stocks have performed quite differently from the overall market because ETF Shares are traded on an exchange, they are subject to additional risks: REIT ETF Shares are listed for trading on NYSE Arca and can be bought and sold on the secondary market at market prices. Although it is expected that the market price of a REIT ETF Share typically will approximate its net asset value (NAV), there may be times when the market price and the NAV vary significantly. Thus, you may pay more or less than NAV when you buy REIT ETF Shares on the secondary market, and you may receive more or less than NAV when you sell those shares. Although REIT ETF Shares are listed for trading on NYSE Arca, it is possible that an active trading market may not be maintained. Trading of REIT ETF Shares on NYSE Arca may be halted if NYSE Arca officials deem such action appropriate, if REIT ETF Shares are delisted from NYSE Arca, or if the activation of marketwide circuit breakers halts stock trading generally. An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Annual Total Returns

The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Funds ETF Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the ETF Shares compare with those of the Funds target index and another comparative benchmark. The U.S. REIT Spliced Index consists of the MSCI US REIT Index, adjusted to include a 2% cash position (Lipper Money Market Average) through April 30, 2009; and the MSCI US REIT Index thereafter. Keep in mind that the Funds past performance (before and after taxes) does not indicate how the Fund will perform in the future.

During the periods shown in the bar chart, the highest return for a calendar quarter was 34.63% (quarter ended September 30, 2009), and the lowest return for a quarter was 38.14% (quarter ended December 31, 2008).

Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares will be higher
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than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.

Portfolio composition
Equity sector diversification
REIT ETF as of 08/31/2010 Asset Management & Custody Banks Consumer Discretionary Consumer Finance Consumer Staples Diversified Banks Diversified Capital Markets Diversified Real Estate Activities Diversified REITs Energy Health Care Industrial REITs Industrials Information Technology Insurance Brokers Investment Banking & Brokerage Life & Health Insurance Materials Mortgage REITs Multi-line Insurance 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 8.50% 0.00% 0.00% 5.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% as of 08/31/2009 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 8.80% 0.00% 0.00% 5.90% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% MSCI US REIT Index as of 08/31/2010 8.50% 5.00% 10

Multi-Sector Holdings Office REITs Other Diversified Financial Services Property & Casualty Insurance Real Estate Development Real Estate Operating Companies Real Estate Services Regional Banks Reinsurance Residential REITs Retail REITs Specialized Finance Specialized REITs Telecommunication Services Thrifts & Mortgage Finance Utilities

0.00% 16.70% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 16.90% 25.20% 0.00% 27.70% 0.00% 0.00% 0.00%

0.00% 17.60% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 14.80% 25.00% 0.00% 27.80% 0.00% 0.00% 0.00%

16.70% 16.80% 25.20% 27.70%

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Investment Advisor
The Vanguard Group, Inc.

Portfolio Managers
Gerard C. OReilly, Principal of Vanguard. He has managed the Fund since its inception in 1996.

Purchase and Sale of Fund Shares

You can buy and sell ETF Shares of the Fund through a brokerage firm. The firm may charge you a commission to execute the transaction. Unless imposed by your brokerage firm, there is no minimum dollar amount you must invest and no minimum number of shares you must buy. The price you pay or receive for ETF Shares will be the prevailing market price, which may be more or less than the NAV of the shares. ETF Shares of the Fund cannot be purchased or redeemed directly with the Fund, except by certain authorized broker-dealers. These broker-dealers may purchase and redeem ETF Shares only in large blocks (Creation Units) worth several million dollars, and only in exchange for baskets of securities rather than cash. For this Fund, the number of ETF Shares in a Creation Unit is 100,000.

Tax Information
The Funds distributions may be taxable as ordinary income or capital gain.

Payments to Financial Intermediaries

The Fund and its investment advisor do not pay financial intermediaries for sales of Fund shares or related services.

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