Small-Cap REIT ETFs Outperform Big Time

ETF Trends

Small-caps have dominated the investment landscape in 2012. Real estate exchange traded funds tracking this asset class are some of the best performing funds so far.

“House prices might have bottomed. This does not necessarily herald growth any time soon, since prices may remain flat for a while, but it is probable that 2012 is the year when house prices stop declining,” Simon Moore wrote on Seeking Alpha.

After the latest slew of strong economic data reports for the U.S., investors may be surprised to find that the real estate sector has added gains. If current market trends continue, the REIT sector could have plenty of opportunity in 2012. [REIT ETFs Attract Dividend Hunters]

Eric Dutram for Zacks reports that the small-cap asset class in real estate was one of the most beaten down areas of the market over the past few years, and they have since been making a noticeable comeback. The small-cap focused real estate ETFs have outperformed their larger and mid-sized counterparts in 2012. [REIT ETFs Positive This Year as Investors Chase Yield]

An in-depth look at two major small-cap focused REIT ETFs:

  • PowerShares KBW Premium Yield Equity REIT (NYSEArca: KBWY) The index this fund tracks holds about 30 different REITs that are traded in the U.S. A dividend weighted methodology is used and 85% of assets are focused on small-cap companies while the other 15% is given to mid-caps. An expense ratio of 31% is charges, but a 6% dividend yield is distributed. The ETF has returned about 10.8% year-to-date.
  • IQ U.S. Real Estate Small Cap ETF (NYSEArca: ROOF) This ETF tracks 42 companies and dedicates about 19% to office REITs, with another 15% allocated to specialized REITs. Mortgage REITs also are included in the top three holdings. Dutram explains that this fund could be a good indicator of the small-cap real estate sector due to its broad range. Year-to-date the fund has returned about 10.6%, with an additional dividend yield of 6.5%.

Prices of REITs have risen sharply with their performance, so investors should be aware that they are prone to the movements in economic growth, rising interest rates, and the commercial property market. [Are High Yield ETFs Also High Risk?]

“REITs do not guarantee the level of distributions to unit holders. Their payouts can fluctuate, or disappear, but they rarely vanish in totality,” Adrian Mastracci, with KCM Wealth Management, said on The Globe and Mail. “REITs are generally subject to the financial health of their tenants. Tenant bankruptcies, prevailing business conditions and the direction of interest rates can all have an effect on vacancy rates.”

Tisha Guerrero contributed to this article.

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