With Yields As High As 10%, Real Estate Funds Drum Up Assets And Appeal
Real estate securities continue to shore up their popularity with ETF investors, with demand for these income-producing assets accelerating in recent months.
Vanguard REIT (VNQ) saw $860.4 million net inflow in the month ended July 25 to take its asset haul this year to $4.12 billion, according to analytics firm XTF.com. Investors have poured fresh money into VNQ every month since the February stock market pullback, including $1.33 billion in June alone.
In search of yield, investors are favoring real estate investment trusts (REITs), according to Todd Rosenbluth, director of ETF research for S&P Global Market Intelligence. These companies own and operate income-producing properties such as shopping malls and warehouses. They typically pay out 90% of their taxable income as dividends to shareholders. It doesn't hurt either that REITs as a group are inwardly focused at a time when Japan and Europe are wracked with a negative or uncertain market outlook.
"Investors sought out securities offering stable income with limited exposure to non-U.S. markets," Rosenbluth wrote in a July 19 note. He noted that many actively managed mutual funds have also been buying this asset class ahead of the elevation of real estate as a new S&P 500 GICS sector in September.
With $35.96 billion in assets, VNQ is not only the largest REIT exchange traded fund, but also the largest ETF investing in U.S. sector equities.
It offers low-cost and diversified exposure to the real estate markets. Its 0.12% expense ratio makes it one of the cheapest options around.
VNQ focuses on equity REITs -- firms that manage various commercial properties -- and shuts out mortgage REITs and specialty REITs.
The property REIT group ranks No. 39 out of 197 industry groups tracked by IBD; the mortgage REIT group ranks No. 95.
The Vanguard real estate ETF's top three holdings out of 150 are Simon Property Group (SPG),Public Storage (PSA) and Welltower (HCN). VNQ yields 3.3%.
Income And Growth
REIT ETFs average a 4.5% yield. That equity income is a big draw for investors at a time when bond rates are mired at historic lows. But Kevin Mahn, president of Hennion & Walsh Asset Management, likes them just as much for their growth potential and relatively low correlation with stocks and bonds.
"REITs continue to fly under the radar" of many investors, Mahn told IBD in a phone interview. VNQ has jumped 17% on the stock market so far in 2016 vs. a 7% gain for SPDR S&P 500 (SPY).
Mahn maintains a small allocation to REITs in client portfolios and is bullish on the sector. "REITs have historically shown they can fare well, even in the face of rising interest rates," he said.
The fear of rising rates was a headwind for the sector in 2015. But Mahn noted that higher rates driven by economic growth and job growth can be a plus. When people have more money to spend, retail REITs like Simon benefit. When more Americans are working, and earning more, health care REITs like Welltower gain.
Equity And Mortgage REITs
Mahn invests in REITs for both attractive income and "good, strong total return characteristics."CoreSite Realty (COR), a highly rated IBD stock, has jumped 74% over the past year on the back of consistent profit and sales growth. The REIT operates nationwide data centers -- a booming business as companies migrate key operations to the cloud. CoreSite releases its Q2 results Thursday.
IBD'S TAKE: Mortgage REITs hold no real estate and are vulnerable to interest-rate hikes. However, the outlook for rates is murky, and the Federal Reserve may have boxed itself in on monetary policy.
When choosing an ETF, Mahn looks first for "an index that is recognized and established." Vanguard REIT, iShares U.S. Real Estate (IYR) and SPDR Dow Jones REIT (RWR) are among the funds that make that cut.
A younger rival, Schwab U.S. REIT (SCHH), offers a rock-bottom 0.07% expense ratio. Among 20-odd options, iShares Mortgage Real Estate Capped (REM) offers the highest yield at 10.6%.
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