David Kathman: Real estate funds can be useful in just about any portfolio, especially as a diversifier. That's because the returns of real estate stocks tend not to be too strongly correlated with the returns of either the broader stock market or with bonds.
Just to give a couple of examples, in 2013 the S&P 500 gained 32%, while the Barclays US Aggregate Bond Index was down 2% and the MSCI US REIT Index of real estate stocks was similarly flat, up just 1%. But then in 2014, the MSCI US REIT Index gained 29%, while the S&P 500 and Barclays Agg had much smaller gains, of 14% and 6%. So having a modest real estate position in your portfolio, say 5% or 10%, can help smooth out returns and ultimately lead to better results over the long term.
As for how to get that real estate exposure, there are a few pretty good options. Vanguard Real Estate Index is by far the largest real estate mutual fund with about $68 billion in assets, more than half of which is in the ETF version. As its name suggests, it’s an index fund that tracks a broad benchmark of real estate stocks, and as you would expect from Vanguard, it’s also very cheap, costing 0.11% for the Admiral shares and 0.12% for the ETF.
DFA Real Estate Securities is another cheap fund in this niche, at 0.18%. It’s not technically an index fund, but like other DFA funds it uses a rules-based approach that results in index-like returns.
The Vanguard and DFA funds are the only funds in the real estate category with Morningstar Analyst Ratings of Silver, but there are quite a few Bronze-rated funds in the category that are actively managed. Some of the more prominent ones are Fidelity Real Estate Investment, Cohen & Steers Realty Shares, and Principal Real Estate Securities. They’re not as cheap as the passive funds I mentioned, but they all have long-tenured managers and strong track records, and they’re all pretty solid ways to get real estate exposure for a portfolio.