Small Cap Real Estate ETFs: Crushing The Competition
As strong data has hit the market, a number of sectors have moved higher in the U.S. in response. While highly cyclical sectors have led the way for the most part, real estate has also added to recent gains. The sector that was nearly decimated during the financial crisis has been on a tear as of late, thanks to positive data points on both the home construction and general business sentiment fronts. Thanks to these factors and the superb yields that are in many funds in this space, it may be time to cautiously cycle back into the REIT sector, especially if current market trends continue (see Three Cyclical ETFs that Are Surging Higher).
Yet, investors should also note that while all real estate ETFs have jumped higher this year, small caps have led the way on the upside. These funds were beaten down more than their large and mid cap focused counterparts in years past and appear to be storming back in recent months. In fact, the two small cap focused real estate ETFs have outperformed the larger ETFs in the space—such as IYR, VNQ, or RWR—by as much as 400 basis points since the start of 2012. Given this trend of outperformance by the small caps, those who are looking for real estate exposure could be better served by considering this segment for their portfolios (read Three Outperforming Active ETFs).
While two funds exist in this corner of the market, they are by no means identical. In fact, there are a number of differences between the two small cap focused real estate ETFs. Thanks to this, investors intrigued by the broad trends in the real estate market, but are looking to make a play on small caps specifically, should consider the breakdown of the two funds below:
PowerShares KBW Premium Yield Equity REIT (KBWY)
This ETF tracks the KBW Premium Yield Equity REIT Index which follows roughly 30 REITs that are traded in the U.S. The index uses a dividend yield weighting methodology and only focuses in on small and mid caps for its holdings. With this focus, close to 85% of the total assets are in small caps with top holdings going to Getty Realty Corp (GTY), CommonWealth REIT (CWH), and Cedar Realty Trust (CDR). In terms of sectors, retail takes the top spot at about 31%, although specialized (26.2%), and office REITs also make up double digit weightings as well. KBWY charges investors 35 basis points a year in fees and pays out a pretty solid 6% in 30 Day SEC Yield terms, suggesting that it could be a decent source of income as well. Beyond this, the fund has also added about 10.8% in year-to-date terms, crushing the 6.4% performance of VNQ in the same time period (read Three Construction ETFs For An Economic Recovery).
IQ U.S. Real Estate Small Cap ETF (ROOF)
For another option in the small cap REIT space, investors should look to IndexIQ’s ROOF. The product tracks 42 companies while charging investors 69 basis points a year in fees for its services. The product also has a good level of diversification among its sector holdings as mortgage REITs make up about one-fourth of the total, but are closely trailed by Office REITs (19.2%), and Specialized REITs (15.2%) to round out the top three. Thanks to this, the fund looks unlikely to be impacted by a downturn in any one segment and could act as a broad barometer for the small cap space. However, investors should note that the product has slightly underperformed KBWY so far this year, gaining 10.6% in the time period. With that being said, the annual dividend yield for ROOF comes in at about 6.5% while the index yield according to the recent fact sheet is 7.5%. Given these figures, ROOF may be able to make up some of its underperformance and higher expenses in the eyes of yield focused investors as its payouts look to be highly competitive with its counterpart from PowerShares (read Three Industrial ETFs For A Manufacturing Revival).
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