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REIT ETFs: The Future is Now

This article was originally published on ETFTrends.com.

Across multiple sectors, the trends of tomorrow are accessible and tangible today. The same is true of the real estate sector and REIT ETFs, but many of the largest exchange traded funds tracking the sector do not adequately reflect the major shifts and compelling story lines that underpin the future of real estate investing.

Among ETFs tracking real estate investment trusts (REITs), the Pacer Benchmark Industrial Real Estate SCTR ETF (INDS) is proving its worth as a credible avenue to some of the most prominent REIT themes: industrial REITs and the e-commerce boom.

INDS offers investors exposure to US companies that generate the majority of their revenue from industrial REITs that are part of the e-commerce distribution and logistics network. INDS provides exposure to the growing e-commerce space by investing in data center and distribution center REITs, along with higher quality retail real estate.

The rapid rise of online giant retailers like Amazon has increased demand for warehouses to store inventory. Around 25% to 30% of warehouse space is currently dedicated to e-commerce.

“First and foremost, what is fascinating it that eCommerce accounts for less than 10% of overall retail sales but is growing 16% year over year for the last 5 years,” said Kevin Kelly, managing partner at Benchmark Investments, in an interview. “Since e-Commerce has grown from 5% of overall sales in 2012 (see attached) to now (less than 10%), industrial REITs have had an excess return of 6.37% per annum, an alpha of 5.62 and a lower downside capture.”

Powerful Performance

ETFs with exposure to online retailers are outperforming those with heavier brick-and-mortar exposure. For the 24 months ended Thursday, Feb. 21< st

While INDS is still a few months shy of its first anniversary, the fund is already showing an ability to outperform its more traditional rivals. Year-to-date, the industrial REIT ETF is higher by 17.21%, an advantage of almost 400 basis points over the Vanguard Real Estate ETF (VNQ) . VNQ allocates just 7.10% of its weight to industrial REITs.

Similarly small weights to industrial REITs are found among old guard real estate ETFs, underscoring the first mover advantage of INDS and the fund's potential long-term potency.

“The insatiable e-commerce demand to receive packages in a day or less has led to an era of ‘last mile’ revolution. It’s an arms race for space,” said Kelly. “Online retailers require about three times - 3X - the warehouse space of traditional brick-and-mortar stores, and more-sophisticated logistical service.”

An 'Arms Race'

While Amazon and other online retailers are seen as the culprits behind the demise of brick-and-mortar retailers (about 2,200 store closures have been announced just this year), online retailers need space, too. They just do not need store space. They need the type of properties owned by INDS member firms.

Chart Courtesy: Prologis

“Amazon and its competitors are often blamed for the death of bricks-and-mortar retail, but the irony is that these online retailers generally achieve fast shipping by investing in real estate—in the form of warehouses rather than stores,” said Kelly.

Bolstering the case for industrial REITs is the fact that demand for this space is being driven by multiple sources, not just e-commerce companies.

“Established players from related industries that already have massive scale are also seeing a chance to compete with Amazon,” adds Kelly. “Both United Parcel Service Inc. and FedEx Corp. have recently announced their own fulfillment programs.”

INDS's 23 industrial REIT holding had an average market value of $8.89 billion at the end of last year and a price-to-funds from operations ratio of just over 18.

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