After a tumultuous 2011 many investors are still finding their footing in the markets as confidence in the global economic recovery remains battered down. Despite persistent volatility in financial markets coupled with a looming debt crisis in Europe, the U.S. economy has demonstrated tremendous resilience; investors on the home front have digested platefuls of better-than-expected data releases from both the housing and labor markets over the past few months [see How To Invest Like UBS In 2012]. Encouraging economic data and signs of a labor market recovery have prompted many to overweight U.S. exposure in their portfolios going into 2012; likewise, the domestic real estate market has caught the attention of investors looking to favorably position themselves as the recovery at home picks up steam.
Consistent increases in new home sales and improving confidence amongst homebuilders have been two signs of a slow, but steady, recovery in the beat down U.S. housing market. Although real estate ETFs provide exposure that is vastly different than owing a home, investors can still tap into an attractive corner of the market. While most of the available real estate products maintain a limited amount of exposure to residential real estate (usually through the ownership of apartment complexes), these funds are typically dominated by commercial and industrial real estate. holdings. Real Estate Investment Trusts (REITs) may offer a compelling option for investors looking to expand their exposure to the domestic real estate market beyond residential properties, as they are impacted by a number of different factors including: unemployment rates, economic growth expectations, consumer confidence, as well as discretionary spending.
Improving economic conditions at home are a key reason to consider REIT ETFs in 2012; this corner of the market stands to benefit from improving business conditions in all sectors, which essentially translates into increased demand for industrial, retail, and office space for companies. The unemployment rate in the U.S. has been steadily decreasing since July of 2011, when the figure stood at an alarming 9.2%. After a few months of gradual improvements, unemployment finally dropped below 9% in December; bullish momentum in the labor market has continued and the latest unemployment rate report in January 2012 surpassed analyst estimates once again, coming in at 8.5%, marking the lowest level since April of 2009.
REIT ETFs are by no means a “must-buy ” in 2012 given all of the overhanging uncertainty stemming from the debt burdened Euro zone which could very well have a negative impact on the domestic recovery [see 12 Rapid Fire ETF Ideas For 2012]. However, this corner of the market certainly offers a rosier outlook than many other asset classes; Moody’s recently said its ratings outlook on U.S. REITs is expected to remain stable across all property types. The ratings agency also added that REITS are well-positioned to hold their ground amidst continuing volatility, and Moody’s senior vice president, Philip Kibel, commented, “The REITs continue to successfully navigate through difficult capital market conditions”.
Investors with bullish prospects for the U.S. economy in 2012 may wish to tap into the lucrative REITs corner of the real estate market. Below we profile some of the instruments available to investors from the Real Estate ETFdb Category:
- Vanguard REIT ETF (VNQ): This is by far the biggest and most popular product in the space, with close to $9.5 billion in assets under management. Thanks to its impressive liquidity, VNQ can serve as both a tactical, short-term trading instrument as well as core holding in a buy-and-hold portfolio. This ETF exposure to over 100 U.S. property trusts that cover about two-thirds of the value of the entire domestic REIT market [see VNQ Holdings].
- iShares Cohen & Steers Realty Majors Index Fund (ICF): This is another well-known fund in the space that offers exposure to real estate investment trusts in the United States. ICF tracks the Cohen & Steers Realty Majors Index, which consists of roughly 30 holdings spread out across all major segments of the investable REITs market. The underlying portfolio is comprised of mostly large cap stocks, although mid caps also receive a modest allocation, resulting in a fairly balanced risk/return profile.
- IndexIQ US Real Estate Small Cap ETF (ROOF): Risk-tolerant investors may wish to consider small cap exposure in the sector in hopes of achieving potentially stellar, uncorrelated returns relative to large cap counterparts. ROOF’s portfolio consists of over 40 holdings and is designed to give investors a means of tracking the overall performance of small capitalization U.S. real estate companies [see Talking Real Estate ETFs With IndexIQ's Adam Patti].
- iShares FTSE NAREIT Industrial/Office Capped Index Fund (FNIO): Investors who believe that employment conditions will continue to improve may wish to consider FNIO, as the REITs featured in this ETF stand to benefit from business expansion. FNIO holds approximately 30 individual companies that operate in the industrial and office sectors of the domestic real estate market [see FNIO Holdings].
- PowerShares Active U.S. Real Estate Fund (PSR): This one-of-a-kind ETF selects its holdings from a universe of securities included in the FTSE NAREIT All Equity REITs Index. PSR employs a methodology that uses quantitative and statistical metrics to identify attractively priced securities for inclusion in its underlying portfolio. Presently, this is the only actively managed product in the real estate ETF space [see PSR Fact Sheet].
Disclosure: No positions at time of writing.
- Talking Real Estate ETFs With IndexIQ’s Adam Patti
- First Small Cap REIT ETF Debuts: ROOF
- Time For A Real Estate ETF?
- The Definitive Guide To Real Estate ETFs: Real Estate ETF Investing 101
- Half Year In Review: Six ETF Stories From The First Six Months of ’09