A Targeted REIT ETF Strategy to Capitalize on Rising Rents, Shifting Demographics
In a low-growth, low-yield environment, many have turned to alternative avenues of income generation, such as real estate investment trusts. Among the various options available, investors should focus on health and residential REITs-related exchange traded funds.
“Balancing the search for income while managing risk remains a challenge for investors,” according to BlackRock. “REITs may play a role in that effort.”
BlackRock argued that residential and health care REITs are two sub-industries that could benefit income investors in the current environment.
Residential REITs, which track multifamily and manufactured homes, apartments and student housing facilities, are supported by job growth, rental demand over home purchases and general household formation.
SEE MORE: Residential REIT ETF Could Capitalize on Diminishing Sentiment Toward Home Ownership
“Demand for rental properties, particularly in growing urban areas like San Francisco and New York, is likely to continue, strengthening the case for investing in residential REITs,” BlackRock said.
Health care REITs include real estate activities that relate to health care industries, such as senior living properties, hospitals and other medical-related properties.
“Demographics, along with government reimbursement rates in programs like Medicaid, are key economic drivers of health care REITs,” BlackRock added.
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ETF investors seeking a targeted investment option for the two areas may look to the iShares Residential Real Estate Capped ETF (REZ) , which includes a 45.0% tilt toward residential REITs, along with 36.8% healthcare REITs and 18.1% specialized REITs. has increased 10.5% year-to-date. REZ also offers an attractive 3.89% 12-month yield. REZ has increased 7.2% year-to-date and offers an attractive 3.89% 12-month yield.
Broader options also include a small tilt toward the sub-industries. For instance, the Vanguard REIT ETF (VNQ) , the largest REITs-related ETF, allocates 12.6% to health care REITs and 14.9% to residential REITs. VNQ increased 14.0% year-to-date and comes with a 3.27% 12-month yield.
SEE MORE: Sector Transition may Already be Baked Into REITs, ETFs
However, potential investors should be aware of the risks that could weigh on the REITs sector. This market segment is particularly vulnerable to rising interest rates since REITs’ interest payments go up with higher interest rates, which means REITs have less cash to pay dividends for investors. REITs were pulling back Friday, following Federal Reserve Chairwoman Janet Yellen’s remarks in Jackson Hole, Wyoming on Friday.
For more information on real estate investment trusts, visit our REITs category.
