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4 Reasons Why Real Estate ETFs Could be Tapped Now

Sanghamitra Saha
·4 min read

The U.S. real estate sector has been under pressure this year with most ETFs returning negative in the year-to-date frame. Real Estate Select Sector SPDR Fund XLRE has been the best performer in the laggards’ space with 5.9% year-to-date losses while Invesco KBW Premium Yield Equity REIT ETF KBWY and Global X SuperDividend REIT ETF SRET have been tagged as the worst performers with about 37.8% and 44.4% losses, respectively.

However, the losing trend may shift ahead because of the below-mentioned reasons.

Rising Inflation

According to Wall Street forecaster James Bianco, the current economic backdrop is favorable for an inflation comeback, as quoted on CNBC. The 30-year Breakeven Inflation Rate was 1.76% in September 2020, up from 1.71% in August 2020, 1.65% in the year-ago month and the one-year low of 1.29% recorded in March 2020.

Plus, the annual consumer price inflation rate in the United States rose to 1.4% in September of 2020 from 1.3% in August, matching expectations and reaching the highest since March. In a rising inflation environment, real estate stocks act as a good bet. Both, resale value of the property and rental income, rise with price inflation.

Uptick in Home Prices is a Boon for Renters

The U.S. homebuilding sector is on fire. Thanks to extremely low mortgage rates, home sales are upbeat. But higher demand for home buying as well as lack of labor and land has boosted home prices. The median home sale price rose 15% year over year to $320,625 — the highest on record, according to a new report from the technology-powered real estate brokerage Redfin released on Oct 8. 

This is a great scenario for renters. Along with some analysts, we too believe that fast-rising home prices are likely to keep prospective homebuyers away from the ownership and direct them toward the rental market. “Homeownership is still dead in this country because the only people that are buying homes right now are people that have equity, great credit and a job,” multi-family housing investor Grant Cardone told Yahoo Finance, quoted on an article.

Still Shaky Job Market = High Demand for Rent from Low-Income Group

The job market is still far from steady. The U.S. economy added 661 thousand jobs in September 2020, easing sharply from an upwardly revised 1.489 million in the previous month, and below market forecasts of 850 thousand. The coronavirus fears are also not subsiding anytime soon. This means demand for real estates for rent purpose is likely to remain strong from middle-income or low-income consumers.

Real Estates Are Lucrative Amid a Low-Yield Environment

If these are not enough, a general low-rate environment is great for real estate stocks and ETFs as these are high-yielding in nature. The benchmark U.S. 10-year treasury yield was 0.85% on Oct 23. Against such a low-yield backdrop, dividends offered by real estate ETFs are quite sturdy.

Some of the decent real estate ETF plays right now are Real Estate Select Sector SPDR ETF (XLRE) (yields 3.10% annually), PPTY U.S. Diversified Real Estate ETF PPTY (yields 3.84% annually) and VanEck Vectors Mortgage REIT Income ETF MORT (yields 11.83% annually). These ETFs have a Zacks Rank #3 (Hold).

Against this backdrop, below we highlight a few real state ETFs that have stayed steady in recent weeks.

ETFs in Focus

IQ US Real Estate Small Cap ETF ROOF – Up 6.2% in the Past four weeks, Yields 5.81% annually

NETLease Corporate Real Estate ETF NETL – Up 4.8% in the Past four weeks, Yields 3.40% annually

Nuveen Short-Term REIT ETF NURE – Up 5.7% in the Past four weeks, Yields 3.24% annually

SPDR Dow Jones REIT ETF RWR – Up 4.7% in the Past four weeks, Yields 3.86% annually

iShares Residential Real Estate ETF REZ – Up 4.3% in the Past four weeks, Yields 3.32% annually

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NETLease Corporate Real Estate ETF (NETL): ETF Research Reports
 
VanEck Vectors Mortgage REIT Income ETF (MORT): ETF Research Reports
 
IQ US Real Estate Small Cap ETF (ROOF): ETF Research Reports
 
Real Estate Select Sector SPDR ETF (XLRE): ETF Research Reports
 
Global X SuperDividend REIT ETF (SRET): ETF Research Reports
 
iShares Residential Real Estate ETF (REZ): ETF Research Reports
 
Nuveen ShortTerm REIT ETF (NURE): ETF Research Reports
 
PPTY U.S. Diversified Real Estate ETF (PPTY): ETF Research Reports
 
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Zacks Investment Research
 
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