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Is it the Right Time to Invest in REIT ETFs? Let's Find Out

Sweta Jaiswal, FRM

Real estate investment trusts (REITs) have had a good run on the bourses so far this year. In fact, the S&P 500 Real Estate (Sector) index has gained 26.2% year to date. A dovish Fed can be sited as the main factor driving the upside. When interest rate drops, mortgage rates fall, making real estate or refinancing mortgages more affordable. This in turn boosts real estate sales.

Further, Sino-US trade war tensions, uncertainty in market conditions due to geo-political tensions, slowdown in the global economy and Brexit woes are making investors jittery, adding to the lure of these funds. This is because these funds offer outsized yields and act as good investing options when increased safe-haven trades keep yields at check (read: Homebuilders ETFs to Gain as Sentiment Surges to Yearly High.)

Let’s take a closer look at the factors that are making the space red hot for investors.

Fed Cuts Rate Again

The Federal Reserve has cut interest rates again — the second time since late July 2019. The rate, which was slashed a quarter basis points in the two-day FOMC meeting that concluded on Sep 18, now stands in the range of 1.75-2%. Also, the central bank projects 2019 interest rate at 1.9%, down from its June prediction of 2.4%. For 2020, the rate is expected to remain at 1.9%, below the June forecast of 2.1%. For 2021, the rate is now projected at 2.1%, down from 2.4%. Interest rate in projected at 2.4% for 2020. The same should be 2.5% over the long haul, unchanged from the June projection.The Federal Reserve also kept chances of another rate cut alive this year in case the economy deteriorates (read: Dividend ETFs to Grab as Fed Cuts Rates Once Again). 

U.S. Economy Goes Strong

The U.S. economy — presently at its historically longest 11th year of expansion — has successfully maintained the momentum. Majority of consumer-centric, business-centric and labor market data for August clearly indicated a growing U.S. economy but at a slow pace, extinguishing recessionary fears. Notably, when an economy is going strong, the housing sector’s prospects brighten up. This is because a thriving economy ramps up alike activities and strengthens people's buying capacity. Demand for real estate accelerates and occupancy increases. In fact, landlords are able to charge higher rents.

With respect to GDP, Fed officials expect the same to increase to 2.2% in 2019 and 1.9% in 2021 from its earlier projection of 2.1% and 1.8%, respectively. Notably, unemployment level is at a 50-year low and there has been a rise in wages. The Fed officials expect unemployment rate of 3.7% for 2019, up from 3.6% expected at its June meeting (read: Industrial ETFs in Spotlight as U.S. Manufacturing Picks Up).

Slew of Encouraging Housing Data

Per the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder confidence rose to 68 in September compared with an upwardly-revised 67 in August, 65 in July and 67 a year ago. Moreover, according to National Association of Realtors, existing home sales rose 1.3% to a seasonally adjusted annual rate of 5.49 million units in August. This compares with analysts’ forecast of a decline of 0.4% to 5.37 million units, according to a Reuters poll. Also, recent favorable data shows that U.S. home construction soared to more than a 12-year high in August. U.S. housing starts jumped 12.3% to a seasonally adjusted annual rate of 1.364 million units, the highest level since June 2007.

REIT ETF’s to Snap Up

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

JPMorgan BetaBuilders MSCI US REIT ETF BBRE — up 25.5% year to date

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 basis points (bps) in fees. The fund has amassed $635.4 million in AUM.

iShares Core U.S. REIT ETF USRT — up 25.4%

The fund tracks the track the investment results of the FTSE Nareit Equity REITS Index. The fund has an AUM of $1.66 billion and charges 8 bps.

Nuveen Short-Term REIT ETF NURE — up 25.3%

The fund provides exposure to U.S. REITs with short-term lease agreements which might display less price sensitivity to interest rate changes than 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 amassed $60 million in AUM (read: Beat Renewed Trade Tensions With These ETFs).

Invesco S&P 500 Equal Weight Real Estate ETF EWRE — up 24.9%

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 amassed $47.7 million in AUM.

Schwab U.S. REIT ETF SCHH — up 23%

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 $6.01 billion in AUM (read: Fed Cuts Rate: Sector ETFs & Stocks Set to Soar).

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Invesco S&P 500 Equal Weight Real Estate ETF (EWRE): ETF Research Reports
 
Schwab U.S. REIT ETF (SCHH): ETF Research Reports
 
Nuveen Short-Term REIT ETF (NURE): ETF Research Reports
 
JPMorgan BetaBuilders MSCI US REIT ETF (BBRE): ETF Research Reports
 
iShares Core U.S. REIT ETF (USRT): ETF Research Reports
 
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