Why Should You Choose REIT ETFs Despite Rate Hike Fears?

Last year, the U.S. Real Estate Investment Trust (REIT) industry failed to repeat the stellar performance it gave in 2014 amid Fed-centric anxieties and global macroeconomic headwinds. Yet, the industry was able to outperform the broader market. Total returns of the FTSE/NAREIT All REITs Index gained 2.3% in 2015 against the 1.4% increase logged by the S&P 500 Index.
 
Economic uncertainly spilled over into 2016 and the REIT space found itself on shaky ground. Then again, the industry managed to fare better than the broader market. As such, for the year to Mar 3, total returns of the FTSE/NAREIT All REIT Index have declined 0.1%, while the S&P 500 Index has lost 2.1%. (Read: 4 REITs for Your Portfolio)

Indisputably, the figures reflect that global macroeconomic uncertainties have taken their toll on the market, leaving investors in the lurch. However, at least REIT investors seem better placed than the rest.  
 
Ahead of the next policy committee meeting slated for this month, Fed uncertainty will surely remain a talking point in the industry. This is because the recent encouraging economic data, right from an upward revision in Q4 GDP, to a growing job market and a higher level of inflation have triggered rate hike fears.
 
Yet, volatility in oil prices, modest-to-flat economic growth in many of the Federal Reserve districts according to the Fed’s Beige book and global issues led by China remain as headwinds.
 
Amid all the uncertainty and the ensuing volatility, the REIT industry remains a good choice, especially for income-seeking investors, for its steady and dependable cash flows. Moreover, one should not forget that the shareholders of this special hybrid class can also gain from the individual market dynamics of different asset types (malls, shopping centers, apartments, offices, hotels, industrial or other facilities) owned and managed by it. (Read: Trump, Clinton Race Ahead: ETFs in Contest)

Dividends Still Standing Tall

Importantly, the U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends. As of Jan 31, the dividend yield of the FTSE NAREIT All REITs Index was 4.47% while the dividend yield of the FTSE NAREIT All Equity REITs Index was 4.00%. Clearly, the REITs continue to offer decent yields and outpaced the 2.34% dividend yield offered by the S&P 500 as of that date.

Capital Access

REITs have been proactive in the capital market in recent years, leveraging on a low rate environment to improve their financials. A total of $59.29 billion in public capital was raised by stock exchange-listed REITs in 2015. In addition, in Jan 2016, stock exchange-listed REITs raised an aggregate of $8.09 billion in public capital against $8.52 billion raised in Jan 2015. This indicates investors’ confidence in this sector and their willingness to pour money into it.


Also, reforms to the Foreign Investment in Real Property Tax Act (FIRPTA) are expected to offer the publicly traded REITs and commercial real estate easy access to capital from foreign investors.  
 
Exploring the Sector Through ETFs
 
We believe that this is the right time to explore the sector through ETFs, so as to reap the benefits in a safer way. Considering the return prospects from dividend income and capital appreciation, we have tracked the following REIT ETFs that could be worth considering:
 
Vanguard REIT ETF (VNQ)
 
The fund, launched in 2004, seeks investment results by tracking the performance of the benchmark – MSCI US REIT Index – which is used to gauge real estate stocks. The fund consists of 154 stocks, which acquire office buildings, hotels and other real property. The top three holdings are Simon Property Group Inc. (SPG), Public Storage (PSA) and Equity Residential (EQR). It charges 12 basis points (bps) in fees. VNQ managed to attract around $28.0 billion in assets under management as of Mar 4, 2016.
 
iShares U.S. Real Estate ETF (IYR)
 
Launched in 2000, IYR follows the Dow Jones U.S. Real Estate Index that measures the performance of the real estate industry of the U.S. equity market. The fund comprises 119 stocks with top holdings including Simon Property Group Inc., American Tower Corporation (AMT) and Public Storage. The fund charges 43 bps in fees and its 30-day SEC yield is 3.59% (as of Jan 29, 2016). As of Mar 4, 2016, it had around $4.0 billion in assets under management.
 
SPDR Dow Jones REIT ETF (RWR)
 
Functioning since 2001, RWR seeks investment results of the Dow Jones U.S. Select REIT Index. The fund consists of 97 stocks that have equity ownership and operate commercial real estates, with the top holdings being Simon Property Group Inc., Public Storage and Equity Residential. The fund charges 25 bps in fees while the 30-day SEC yield is 3.40% (as of Mar 3, 2016). Its assets under management were $3.3 billion as of Mar 4, 2016.  (Read: Forget Rate Worries; Buy these Top Ranked Real Estate ETFs)
 
Schwab US REIT ETF (SCHH)
 
This fund debuted in 2011 and tracks the total return of the Dow Jones U.S. Select REIT Index. The fund consists of 98 stocks that own and operate commercial real estates. The top three holdings are Simon Property Group Inc., Public Storage and Equity Residential. It charges 7 bps in fees while the 30-day SEC yield is 3.25% (as of Mar 4, 2016). Further, SCHH had $1.9 billion in assets under management as of Mar 4, 2016.
 
First Trust S&P REIT Index Fund (FRI)
 
Launched in May 2007, FRI is an ETF that seeks investment results of the S&P United States REIT Index. The fund comprises 157 stocks with the top holdings being Simon Property Group Inc., Public Storage and Equity Residential. The fund charges 50 basis points (bps) in fees and its 30-day SEC yield (as of Jan 29, 2016) is 3.74%. FRI had about $222.1 million in assets under management as of Mar 4, 2016.        
 
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VIPERS-REIT (VNQ): 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
 
FT-SP REIT IDX (FRI): ETF Research Reports
 
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