REIT ETFs Rebound; Time to Buy? - ETF News And Commentary
October 08 2013 - 11:14AM
Zacks
After a bull run in the
first four months of the year, the U.S Real Estate Investment Trust
(REIT) industry had nosedived after the onset of “taper talk” which
pushed up interest rates sharply. Since then, the downside risk in
the sector has been acute with S&P/TSX Capped Real Estate Index
trimming about 5.10% in the last six months.
However, the trend recently saw a reversal after the Federal
Reserve’s surprising ‘No Taper’ decision that ended four months of
market speculation (Read: REIT ETFs Rise as Treasury Yields Finally
Tumble).
The Positives
Prior to the recent uptrend in interest rates, these high-dividend
paying stocks were in great demand due to ultra-low interest rates.
After the no-taper shocker, this interest rate
sensitive REIT sector sending it northward. Since then, the sector
has been outperforming the broader market.
The yield on the benchmark U.S. Treasury 10-year note has
declined to 2.63% as of October 4, 2013 from 2.76% as on September
19, 2013.
Investors are once again turning their focus towards this corner of
the investing world in view of the fact that yield on 10-year
Treasury note is still lower than the average rate of 6.4% during
1912 to 2013, even after the spike in interest rates in recent
times should soothe investors’ nerves (Read: Mortgage REIT ETFs: Is
The Plunge Over?).
Dividends still remain an attraction in the sector. With the U.S.
law requiring REITs to distribute 90% of their annual taxable
income in the form of dividends to shareholders, yield-seeking
investors continue to prefer these stocks. A decline in borrowing
costs normally supports REITs dividend profile since the policy is
in favor of servicing debt and accessing capital. This favorable
business environment helps REITs boost their dividends. Recovering
housing and labor markets will also act as major tailwinds.
Market Impact
In such a scenario, investors might want to pay close attention to
the REIT ETF market in the near term. Below, we briefly highlight
the some funds in the space which could be great short-term picks.
Vanguard REIT ETF (VNQ), iShares U.S. Real Estate ETF (IYR), SPDR
Dow Jones REIT ETF (RWR), Schwab U.S. REIT ETF (SCHH), and First
Trust S&P REIT Index Fund (FRI) gained a respective 2.24%,
2.44%, 2.28%, 2.0% and 2.1% in the last month (as of September 25)
while SPDR S&P 500 (SPY) added 1.94% during the time frame (see
more ETFs in the Zacks ETF Center).
VNQ is an extremely popular choice in the space with more than$17.0
billion in assets, but funds like IYR ($4.5 billion) and RWR ($2.0
billion) also attract sufficient investments. Among these, SCHH and
FRI are slightly overlooked options with around $500 million and
150 million of AUM respectively.
Among the five, SCHH is the cheapest charging only 7 basis points
in annual fees while VNQ and RWR cost 10 bps and 25 bps
respectively. However, IYR and FRI are pricier funds charging
48 and 50 basis points individually, slightly higher than the
average expenses charged by their other REIT cousins.
Investors should note that all funds barring SCHH (1.9% as of Sep
25) currently have a dividend yield more than 3%. The funds have
more-or-less 50% investment in large caps giving a leeway for
decent capital appreciation since the remaining 50% of the assets
are invested in mid-to-small-caps which are known for their high
return-high risk criteria.
Road Ahead
Given that REITs were highly beaten down since late May, this could
be a good entry point to the sector. Moreover, with taper talk
coming to rest as of now, REITs are likely to surge higher in the
coming weeks.
Having said all, the duration of this trend is still unclear with
some macro concerns even in a positive scenario. Reacting to Fed’s
surprise announcement last month, investors are now dithered about
the future of QE, a possible government shutdown and the debt
ceiling debate.
A trimmed outlook for 2013 and 2014 US GDP has also added to the
woes. All these had a slightly negative impact on the REIT sector
alongwith the broader market. Hence, after shooting up on September
19, the REIT ETFs began to slide (read: Bet Against Real Estate
with These Short REIT ETFs).
Also one word of caution
is that sooner or later, at least a soft taper will be put into
action. Till then, income seeking investors can reap the return
from REIT investing thanks to the sector’s low valuation. On a
greener side, funds with higher exposure in retail, residential and
healthcare REITs will likely be less ruffled amid rising rates
compared to the funds with increased coverage in mREITs.
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FT-SP REIT IDX (FRI): ETF Research Reports
ISHARS-US REAL (IYR): ETF Research Reports
SPDR-DJ W REIT (RWR): ETF Research Reports
SCHWAB-US REIT (SCHH): ETF Research Reports
VIPERS-REIT (VNQ): ETF Research Reports
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