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Here's Why Investors Are Pouring Money into REIT ETFs

Since its separation from the financial sector, real estate investment trusts or REITs have attracted investors’ attention. According to ETF.com, the broader real-estate sector ETF – Real Estate Select Sector SPDR XLRE – registered a healthy inflow of $2.8 billion last week, the highest among other ETFs. Now let’s have a look at some of the key drivers behind the growing popularity of REIT ETFs.

Impressive Dividend Yield

This is one of the popular sectors best known for its potential to offer healthy dividend yields. In an environment, when most of the sovereign bonds throughout the globe are suffering from low and negative yields, investors are turning their focus toward sectors that have a solid track record to provide steady dividend yields. Traditionally, REITs boast high dividend payouts, as they are required (per the U.S. laws) to distribute 90% of their annual taxable income in the form of dividends (read: Can REIT ETFs Really Enjoy Independence?).

Moreover, a surge in volatility level over the past one-month also played a major role in boosting the popularity of dividend yielding securities, which in turn had a positive impact on REIT ETFs. The fear-gauge CBOE Volatility Index jumped 21.9% in the trailing one-month amid concerns including uncertainty regarding rate hike and inconsistent movement in oil prices. The companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis (read: Keep Faith in These Dividend ETFs to Fight Uncertainty).

Low Interest-Rate Environment

Meanwhile, a significant reduction in rate hike chances in this month’s policy meeting, which is scheduled to start today, is also speculated to boost the sector further. In fact, it is currently expected that the Fed will not raise the key interest rate before its December meeting. This means that a low-rate environment is expected to last for a longer period of time, which will boost sectors like REIT that require significant amount of debt as rate hike means an increase in borrowing cost.

Separately, the National Association of Home Builders and Wells Fargo reported that builder confidence index rose to an 11-month high level of 65 points in September. This also had a significant impact on REITs yesterday. Moreover, a steady U.S. economy, especially in a sluggish global economic growth environment, is also speculated to boost the sector (read: What ETF Investors Need to Know About the New Real Estate Sector).

REIT ETFs to Watch

In this backdrop, we have highlighted three REIT ETFs other than XLRE, which have also registered healthy inflows in recent times amid rising popularity of this sector among investors.

Vanguard REIT ETF VNQ

This fund tracks the MSCI US REIT Index. In total, it holds 150 securities in its basket with 34.5% of its assets invested in the top 10 holdings. The fund is the most popular ETF in its space with $34.1 billion AUM and a solid daily average volume of nearly 4 million shares. VNQ charges only 12 bps in annual fees. The fund has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook and dividend yield of 4.86%. The ETF attracted $266.3 million in net inflows in the month-to-date time frame (read: 3 Real Estate ETFs to Play Brexit Fears).

Schwab US REIT ETF SCHH

This fund tracks the Dow Jones U.S. Select REIT Index. In total, it holds 114 securities in its basket with 42.8% of its assets invested in the top 10 holdings. The fund has amassed $2.8 billion AUM and sees moderate daily average volume of more than 445,000 shares. SCHH charges only 7 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. The ETF has a dividend yield of 2.4%. The ETF registered net inflow of $34.8 million this month.

iShares Cohen & Steers REIT ICF

This ETF follows the Cohen & Steers Realty Majors Index. In total, it holds 30 securities in its basket with more than half of its assets invested in the top 10 holdings. The fund has $4.1 billion AUM and sees a moderate daily average volume of more than 215,000 shares. ICF has an expense ratio of 0.35%. The ETF has a Zacks ETF Rank #1 with a Medium risk outlook and dividend yield of 3.57%. The ETF took in $5.2 million in net inflows in the month-to-date time frame.

Want more information on the world of ETFs?

Make sure to check out the podcast below where we discuss the investing landscape with Kevin O’Leary and Connor O’Brien of O’Shares Investments:


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
VIPERS-REIT (VNQ): ETF Research Reports
 
ISHARS-C&S REIT (ICF): ETF Research Reports
 
SPDR-RE SELS (XLRE): ETF Research Reports
 
SCHWAB-US REIT (SCHH): ETF Research Reports
 
To read this article on Zacks.com click here.
 
Zacks Investment Research
 
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