It is not surprising that, broadly speaking, real estate investment trusts (REITs) and the related exchange traded funds (ETFs) are lagging the broader market this year. REIT ETFs are historically sensitive to rising interest rates and the Federal Reserve is doing just that: hiking rates.
In fact, markets are pricing in a rate increase for later this month, later this year and into 2019. REIT ETFs are feeling the pinch. The Vanguard Real Estate ETF (NYSEARCA:VNQ), the largest U.S.-listed REIT ETF, is trailing the S&P 500 by nearly 700 basis points on a year-to-date basis.
But, and this is an important “but,” REIT ETFs have recently been perking up. For the 90 days ending Sept. 17, VNQ is up 5.60%, an advantage of 100 basis points over the S&P 500. That could be a sign Fed tightening is already priced into REIT ETFs.
Investors considering shopping for REITs may want to consider some of the following REIT ETFs.
Nushares Short-Term REIT ETF (NURE)
Expense ratio: 0.35% per year, or $35 on a $10,000 investment
The Nushares Short-Term REIT ETF (CBOE:NURE) is the ideal REIT ETF for investors looking to mitigate some of this asset class’s sensitivity to rising interest rates. NURE components typically have shorter leases than the REITs found in rival funds, a trait that helps diminish this fund’s sensitivity to Fed tightening. NURE targets the Dow Jones U.S. Select Short-Term REIT Index.
That index “is composed of U.S. exchange-traded equity REITs that concentrate their holdings in apartment buildings, hotels, self-storage facilities and manufactured home properties which typically have shorter lease terms than REITs that invest in other sectors,” according to Nushares.
NURE is outperforming longer-term REIT rivals as highlighted by a year-to-date gain of almost 7%. Plus, this REIT ETF does not make investors sacrifice income to gain some protection from rising rates. NURE has a 30-day SEC yield north of 3%.
Invesco S&P 500 Equal Weight Real Estate ETF (EWRE)
Expense ratio: 0.40% per year
As is the case with ETFs tracking other sectors, many of the largest REIT ETFs are cap-weighted. The Invesco S&P 500 Equal Weight Real Estate ETF (NYSEARCA:EWRE) offers an alternative by using the well-known equal-weight methodology.
Funds and indexes that are equally weighted usually tilt toward smaller stocks, but the average market capitalization of EWRE’s 32 holdings is $20.56 billion, giving this REIT ETF a large-cap feel. However, approximately 59% of this REIT ETF’s holdings are classified as mid-cap stocks.
EWRE is up just 1.72% year-to-date, but the REIT ETF has been gaining some momentum as highlighted by a third-quarter gain of 5.62%.
Pacer Benchmark Industrial Real Estate SCTR ETF (INDS)
Expense ratio: 0.60% per year
The new fund’s underlying benchmark, the Benchmark Industrial Real Estate SCTR Index, cell tower REITs, data center REITs and related REITs. In other words, investors looking to play the e-commerce boom via REIT ETFs have a friend in the new INDS.
Obviously, INDS is a new REIT ETF, so measuring its long-term performance is impossible at this juncture, but the fund is off to a solid start as highlighted by a gain of 4.24% since inception.
Schwab U.S. REIT ETF (SCHH)
Expense ratio: 0.07% per year
Everyone loves cheap ETFs and there are some to consider in the REIT space. For the moment, the Schwab U.S. REIT ETF (NYSEARCA:SCHH) is the least expensive U.S.-listed REIT ETF with an annual fee of just 0.07%. The $4.8 billion SCHH tracks the Dow Jones U.S. Select REIT Index and is a plain vanilla approach to REITs.
SCHH allocates about 40% of its combined weight to residential and retail REITs while office and specialized REITs combine for 28.50%. This cap-weighted REIT ETF has a trailing 12-month distribution rate of 2.64%. Office REITs, including some held by SCHH, could be at the epicenter of the industry’s next wave of consolidation.
“A shakeup may be in store for the office REIT sector with firms likely to change hands as interest rates rise and investors — private equity funds, other REITs and foreign investors — seek opportunities for placing large amounts of available capital,” reports National Real Estate Investor.
JPMorgan BetaBuilders MSCI US REIT ETF (BBRE)
Expense ratio: 0.11% per year
The JPMorgan BetaBuilders MSCI US REIT ETF (NYSEARCA:BBRE) is a new, cost-effective addition to the universe of REIT ETFs. BBRE is just over three months old, but data confirm investors are embracing this fund. As of Sept. 17, BBRE had $60.35 million in assets under management, a solid total for an ETF of this age and one residing in highly competitive space.
BBRE is the first dedicated REIT ETF from JPMorgan Asset Management, one of the fastest-growing U.S. ETF sponsors. The new REIT ETF tracks the widely followd MSCI U.S. REIT Index and holds 154 real estate stocks.
Retail and specialized REITs combine for about 36.60% of BBRE’s weight while residential and office REITs combine for almost 30%.
Invesco Active U.S. Real Estate ETF (PSR)
Expense ratio: 0.35% per year
Real estate is an example of an asset class where active management may offer some advantages and the Invesco Active U.S. Real Estate ETF (NYSEARCA:PSR) is an ETF with which to tap that theme. In its favor, this REIT ETF, while actively managed, is noticeably less expensive than rival actively managed real estate mutual funds.
PSR’s “selection methodology uses quantitative and statistical metrics to identify attractively priced securities and manage risk,” according to Invesco.
PSR, which has a four-star rating from Morningstar, holds 70 REITs with an average market capitalization of $21.54 billion. This REIT ETF is up 11.41% over the past six months.
iShares Europe Developed Real Estate ETF (IFEU)
Expense ratio: 0.48% per year
With European stocks lagging U.S. counterparts while sporting more attractive valuations, the iShares Europe Developed Real Estate ETF (NASDAQ:IFEU) is a REIT ETF to consider for risk-tolerant value investors with longer time horizons. All that said, IFEU is down less than 1% this year while the S&P Europe 350 Index is lower by 5.10%.
This REIT ETF, which is nearly 11 years old, targets the FTSE EPRA Nareit Developed Europe Index and holds 103 REITs. IFEU features exposure to about dozen developed European nations, including members of the Eurozone and non-Eurozone REITs. The U.K. and Germany, the Eurozone’s largest economy, combine for over half of this REIT ETF’s roster.
Ex-U.S. developed market dividend payers often yield more than the equivalent U.S. stocks and that is true some REITs, too. IFEU yields a tempting 4.17%, or more than 60 basis points more than the yield on the Dow Jones U.S. Real Estate Index.
As of this writing, Todd Shriber owns shares of VNQ.