Select REIT ETFs Have Tailwinds

ETF Trends

Exchange traded funds offering exposure to real estate investment trusts (REITs) were prime beneficiaries of the Federal Reserve’s easy money, ultra-low interest rate policies.

That proved to be a double-edged sword for some REIT ETFs as REIT equities were repudiated on speculation the Fed would move to trim its $85 billion in monthly bond purchases.  Fortunately for income investors that have embraced REIT ETFs, tapering has not arrived yet and the nomination of Janet Yellen to lead the Fed next year could provide for further upside for income-generating asset classes and sectors.[Rising Rates Drag REIT ETFs to Bear Market]

S&P Capital IQ sees opportunity with ETFs that feature exposure to multi-family REITS.

“According to data tabulated by the U.S. Census Bureau, the national homeownership rate, on a seasonally adjusted basis, fell to 65.1% in the second quarter of 2013. This represents the lowest level since the fourth quarter of 1995, and is well below the 69.2% reported for the first quarter of 2005. We think there are several possible explanations,” said the research firm in a note.

“First, many previous homeowners may still be reluctant to re-enter the market after suffering losses from the de-valuation of their homes during the recession. Second, the ‘echo boomer’ population, children of the ‘baby boomers’, is now moving into the housing market. Typically, young adults have a much higher propensity to rent. Finally, the economic recovery is adding to jobs and, we believe, contributing to the level of new household formations and demand for all types of housing.”

S&P Capital sees favorable rental trends in some parts of the U.S. as well, potentially good news for stocks that like AvalonBay Communities (AVB), Essex Property Trust (ESS), Home Properties (HME) and Post Properties (PPS).

S&P Capital IQ has four-star ratings on all of those names. AvalonBay and Essex Property are both top-10 holdings in the $289.5 million iShares Residential Real Estate Capped ETF (REZ) . REZ has a trailing 12-month yield of 3.42% and is rated marketweight by S&P Capital IQ.

“REZ gets high marks for S&P Capital IQ Risk Assessment as well as cost factors, such as its bid/ask spread. The fund’s top-10 holdings also include four stocks with favorable STARS recommendations from S&P Capital IQ equity analysts,” said the research firm.

S&P Capital IQ has an overweight rating on the Vanguard REIT ETF (VNQ) . Residential REITs comprised 16.1% of VNQ’s weight as of the end of the third quarter. [Diversified REIT ETFs for Yield]

With an expense ratio of just 0.1% per year, VNQ is cheaper than 93% of rival fund, according to Vanguard.

Vanguard REIT ETF

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VNQ

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of VNQ.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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