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Apple fiscal Q4 earnings preview

Here's Why REIT ETFs are Sizzling With Opportunities

Sweta Jaiswal, FRM
·5 mins read

Real estate investment trusts (REITs) funds look like attractive choices for investors now. A dovish Fed can be cited as the main reason. When interest rates drop, mortgage rates fall, making real estate or refinancing mortgages affordable. This in turn boosts real estate sales. Moreover, these funds offer outsized yields and act as good investing options when increased safe-haven trades keep yields at check.

Notably, low interest rates are boosting demand in the housing market, resulting in an increase in mortgage applications. Analysts believe support from the Federal Reserve is helping keep rates at such low levels. Also, rising uncertainty related to the coronavirus outbreak is driving demand for safe-haven assets like U.S. Treasuries (per the Reuters article). This, in turn, will help drive consumer spending and demand in the housing market.

In fact, the 30-year fixed-rate mortgage averaged 2.86% for the week ending Sep 10, going by the latest Freddie Mac report. The metric has declined by 13 basis points from the week before and marks the ninth all-time record low in 2020. Earlier, the 30-year fixed mortgage rate hit a record low of 2.88% in the week ending Aug 29. The decline in mortgage rates is largely due to a delayed summer slowdown in economic recovery. However, this has led to increased demand and purchase activities in the real-estate sector.

Other factors than can support REIT funds are:

Improving U.S. Economy

Notably, reports of a spike in new coronavirus cases across the United States seem to have subsided a bit, buoying investors’ enthusiasm. Also, encouraging data indicating that the U.S. economy is gradually returning to the pre-pandemic level will add to the strength. In fact, the latest jobs data, which showed that the economy added 1.4 million jobs in August and unemployment rate dropped to 8.4% from 10.2%, is an indication of an improving economy. Encouragingly, about half the jobs that were lost during the pandemic have been recovered.

Per the Institute for Supply Management’s (ISM) Sep 1 statement, the index of national factory activity rose to a reading of 56.0 last month from 54.2 in July. Economists polled by Reuters forecast a rise in the index to 54.5 in August.

Moreover, the Commerce Department recently reported that new orders for U.S. manufactured goods rose for the third consecutive month in July by 6.4%. The uptick in July not only surpassed the consensus estimate of 5.6% but also matched the upwardly revised spike in June. The report also highlighted that factory orders for durable goods continued the upward movement, rising 11.4% in July compared with the 7.7% rise the month before.

Impressive Housing Data

After being hit by the coronavirus pandemic, the housing market has shown a strong rebound, largely due to low mortgage rates and higher demand for new homes. Per the monthly NAHB/Wells Fargo Housing Market Index (“HMI”), builder confidence for newly-built single-family homes surged to 78 points in August from 72 in July, 58 in June, 37 in May and 30 in April (the lowest since June 2012).

Another round of upbeat data from the U.S. housing market signals that the sector is gaining the momentum back. According to the U.S. Housing and Urban Development and Commerce Department, total housing starts rose 22.6% (the biggest gain since October 2016) to a seasonally-adjusted annual rate of 1.50 million units in July, per a NAHB press release.

Building permits, a construction pointer for the coming months, jumped 18.8% to an annualized rate of 1.50 million units in July.

Going on, sales of existing homes in July witnessed the strongest monthly rise in the survey’s history since 1968. National Association of Realtors’ (“NAR”) data showed a 24.7% rise in existing homes sales to a seasonally adjusted annual rate of 5.86 million units in July (the highest sales pace since December 2006).

REIT ETFs to Shine

Against this backdrop, investors can take a look at the following ETFs:

Schwab U.S. REIT ETF SCHH 

The fund tracks the total return, before fees and expenses, of the Dow Jones U.S. Select REIT Index. SCHH is charging 7 bps in fees. The fund has amassed $4.44 billion in AUM.

iShares Core U.S. REIT ETF USRT 

The fund tracks the investment results of the FTSE Nareit Equity REITS Index. It has an AUM of $1.44 billion and charges 8 bps (read: ETFs to the Rescue as Coronavirus Wreaks Havoc).

JPMorgan BetaBuilders MSCI US REIT ETF BBRE

BBRE tracks the U.S. equity REIT market and invests at least 80% of its assets in securities included in the MSCI US REIT Index. BBRE is charging 11 bps in fees. The fund accumulated $941.4 million in AUM.

Nuveen Short-Term REIT ETF NURE 

The fund provides exposure to U.S. REITs with short-term lease agreements, which might display less price sensitivity to interest rate changes than the REITs with longer-term lease agreements. NURE tracks the investment results, before fees and expenses, of the Dow Jones U.S. Select Short-Term REIT Index. NURE is charging 35 bps in fees. The fund has gathered $54.8 million in AUM.

Invesco S&P 500 Equal Weight Real Estate ETF EWRE

EWRE invests at least 90% of its assets in securities included in the S&P 500 Equal Weight Real Estate Index. EWRE is charging 40 bps in fees. The fund has collected $19.2 million in AUM (read: Looking to Cut Costs? Tap Zero-Fee ETFs).

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Schwab U.S. REIT ETF (SCHH): ETF Research Reports
 
Invesco SP 500 Equal Weight Real Estate ETF (EWRE): ETF Research Reports
 
iShares Core U.S. REIT ETF (USRT): ETF Research Reports
 
Nuveen ShortTerm REIT ETF (NURE): ETF Research Reports
 
JPMorgan BetaBuilders MSCI US REIT ETF (BBRE): ETF Research Reports
 
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Zacks Investment Research
 
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