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Real Estate ETFs see shift in momentum

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Cinthia Murphy, Managing Editor of ETF.com, joins Yahoo Finance to discuss the state of the real estate market and the increased popularity in Real Estate ETFs this year.

Video Transcript

KRISTIN MYERS: I want to turn now to our ETF report brought to you by Invesco QQQ. We're going to be chatting real estate today. We've got Cinthia Murthy, managing editor of ETF.com, joining us now. Cinthia, it's always great to have you here with us. Now you were saying that real estate ETFs are very popular this year. Now, of course, we've seen the real estate markets running incredibly hot all around the country. Do you see a bubble forming here? And are those ETFs a good way to hedge, if so?

CINTHIA MURPHY: Hi, Alexis. It's great to be here. You know, it's been an interesting market in real estate because if you think of it as an investment opportunity, actually, there's two different currents going on in the real estate market. So you have your housing stocks and ETFs that access those stocks. And then you have your commercial real estate stocks, your REITs, which, you know, if you look at the last 12 months, it really has been a housing story. It's the pandemic boom. It's people looking for houses. It's shortage of inventory. It's the rise in lumber prices so construction prices are up.

Mortgage rates are low, at 50-year lows. So demand for housing just exploded. So the ETFs that access housing, funds like ITB, XHB, have had a phenomenal 12-month run. If you look at the commercial real estate market, it's been a very different story. In the 12-month run, they lagged significantly housing ETFs by at least half in terms of performance. Because everybody is working from home. There's no demand for commercial real estate, a lot of empty office buildings. You know, the whole narrative, we're very familiar with.

What has been interesting is that year to date and especially in the last month, things have shift gears completely. And the housing market has lost a lot of steam. Those ETFs had totally struggled to make new highs, where the commercial real estate has really picked up pace, as offices start to reopen, employees are going back to the office. So there's been a complete shift in momentum. And right now, it is commercial REITs that are really delivering the performance year to date. They're up about 25%, which is about 10 points higher than the S&P 500. So it's just kind of interesting to watch this different dynamic within the real estate market.

ALEXIS CHRISTOFOROUS: So how does that compare to people's exposure to residential real estate? Are those REITs also popular right now? And what are you telling clients who are looking for a little real estate exposure in the ETF world?

CINTHIA MURPHY: Yeah, it's a great question because traditionally, a REIT ETF-- and there's several of them. Like, the bigger ones would be VNQ or IYR, some tickers to look at. They're mostly commercial REITs. In fact, these two funds, for example, only have about 13% of their portfolio tied to residential REITs. So it really is a play on commercial real estate. If you really want to play the residential story, there's one residential REIT ETF that comes to mind, REZ. So that's a more direct way to play that story.

But typically, investors choose your housing ETFs, where you have your construction companies, where you have some housing furnishings. And your Home Depot's and Lowe's are in these portfolios, which would be ITB and XHP. This year, in particular, the demand has been on your commercial REIT ETFs. But the residential REITs aren't far behind.

I mean, it's still a really strong story. Low interest rates are good for REIT values. So it's a positive story. It's just that the housing, it really got so hot that it had to cool down a little bit. And now a lot of people are starting to delay construction. If it's not-- if you don't have to build a house right now, people are putting it on hold. So it's really cool down the momentum in housing. And the activity has picked up on the commercial side.

KRISTIN MYERS: So Cinthia, we actually have some charts going there on the screen. But I am hoping that you can talk through some ETFs that people right now in particular should pay attention to, at least within this real estate space.

CINTHIA MURPHY: Yeah, I think in the S&P 500, you know, if you want to just look at from an S&P 500 sector perspective, XLRE would be a real estate sector within the S&P 500. It's a good place to start looking at the space. IWR, which is an iShares real estate product, where more than two-- more than 80% of the portfolio is commercial real estate. I mean, that fund has seen its asset grow by 30% in the last week. It's picked up more than a billion dollars in assets in just five days. So it's really in demand right now. The biggest one that has really get the most traction in the space is VNQ. It's a Vanguard product. And it's a broad real estate REIT portfolio, mostly commercial again. That's the big focus there. But these are funds that have picked up a lot of assets this year.

ALEXIS CHRISTOFOROUS: You know, I know that inflows into these real estate REITs is on the rise. I wonder what you're seeing outflows in right now. What are investors sort of pulling their money out of, in addition to Bitcoin, which I know is not yet an ETF?

CINTHIA MURPHY: Yeah, there's still, I think, a lot of hesitation with the growth stocks. You know, like the funds that were super popular last year, we're still seeing them struggle to find a lot of new, excited asset base. Because there's just this-- I think there's a little bit of hesitation on what the inflation story looks like.

So there's a growing narrative here that kind of supports what the Fed has been saying, that the spike in inflation, which people have seen as negative for growth stocks and really hurt flows into that space, is really just temporary. And it's not going to hold. It's just a reflection of this energy in this immediate reopening trade. And once this movement is over, then we should see below 2% inflation, which has been the long term trend. In that case, growth stocks come back into the spotlight a little bit. But we're still seeing a hesitation to jump into the hot growth names we watched all of last year.

KRISTIN MYERS: All right, Cinthia Murphy, managing editor of ETF.com, thanks for joining us today for our ETF report.