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An Alternative View on REITs and the Related ETFs

editor@etftrends.com (ETF Trends)

Real estate investment trusts (REITs) and sector-related exchange traded funds (ETFs) are a good source of attractive payouts in a low-yield environment.

REITs are securities that trade like a stock and invest in real estate directly through property ownership or mortgages. Consequently, revenue are mainly generated through rents or interest on mortgage loans. To qualify for special tax considerations, the asset also distributes the majority of income, about 90% of taxable profits, to investors as dividends.

The Vanguard REIT ETF (VNQ) , SPDR Dow Jones REIT ETF (RWR) and iShares Dow Jones US Real Estate Index Fund (IYR) are among the most popular REIT ETF plays.

Related: Undersupplied Housing Market Helps Boost This REIT ETF

Some market observers believe REITs will see increased after becoming the eleventh sector in the Global Industry Classification Standard, a change that became official last Friday. The logic behind that belief is that many active managers are under-allocated to real estate stocks and will be forced to buy those names to move inline with their benchmarks with real estate now being its own sector.

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However, some analysts believe that enthusiasm is not all it is cracked up to be.

“Although the attention from becoming an independent sector could add some temporary support to REITs, we would likely become more constructive on the sector at lower price levels given its relative attractiveness, especially compared to Utilities,” according to a BMO Capital Markets note posted by Amey Stone of Barron’s.

When S&P Dow Jones Indices and MSCI announced they would create an independent real estate sector, J.P. Morgan projected that active equity funds were so underweight toward REITs that the new sector could cause $100 billion flows to the category. Since the newly minted sector would rival in size to utilities, telecoms and materials sectors, a number of fund managers who have not included REITs exposure may eventually bulk up on real estate.

SEE MORE: 44 Best REITs ETFs to Generate Yields

BMO “initiated its coverage of the REITs sector with a “neutral” rating on Friday. BMO sees advantages to the sector reclassification, which could increase asset flows, but is also worried about high valuations and a rising interest rate environment over the next few years,” according to Barron’s.

For more information on real estate investment trusts, visit our REITs category.

Vanguard REIT ETF

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.