With expectations that the Federal Reserve will hold off on raising interest rates this year and investors gravitating to some higher-yielding asset classes, the real estate sector and the related exchange-traded funds (ETFs) are thriving in 2019.
The MSCI U.S. Investable Market Real Estate 25/50 Index, a widely followed gauge of domestic real estate equities, is up over 16% year-to-date. Indeed, real estate ETFs are clearly benefiting from the extension of this bull market, but there is more good news.
Investors considering real estate ETFs are benefiting from increased choices. Gone are the days when the only funds on the market were broad funds focusing on large-cap, traditional real estate investment trusts (REITs). These days, investors have a broader array of real estate ETFs to consider, allowing them to get tactical while accessing some prominent themes and still generating compelling levels of income.
Here are some of the best real estate ETFs to consider right now.
Real Estate ETFs: Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF (SRVR)
Expense Ratio: 0.6% per year, or $60 on a $10,000 investment.
The Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF (NYSEARCA:SRVR) is a prime example of a real estate ETF built for the sector’s changing investment opportunities. SRVR’s member firms are at the epicenter of seismic shifts in demands for data storage facilities due to booms in 5G, cloud computing and other technology-driven themes.
“The five publicly traded data center REITs have rebounded mightily thus far in 2019, though. As of April 2, according to Nareit, the year-to-date return for data center REITs totaled 22.5 percent, less than only one other REIT sector — industrial (22.8 percent),” according to National Real Estate Investor.
SRVR is a right place, right time real estate ETF because many of its traditional rivals lack adequate exposure to data storage REITs. The difference in results between having and not having that exposure are palpable. SRVR is beating the aforementioned MSCI US Investable Market Real Estate 25/50 Index by 600 basis points this year.
Pacer Benchmark Industrial Real Estate SCTR ETF (INDS)
Expense Ratio: 0.6%
Keeping with the theme of nuanced real estate ETFs that are trouncing their standard rivals, there is the Pacer Benchmark Industrial Real Estate SCTR ETF (NYSEARCA:INDS). While its stablemate SRVR is dedicated to REITs with exposure to transformative technology themes, INDS is at the forefront of retail disruption.
Industrial real estate properties can have many uses, but one of the primary drivers of INDS’s success is the demand for warehouse space being created by surging online retail sales. Those demands are boosting occupancy rates, allowing some industrial REIT operators to have pricing power. Those factors and others explain why INDS is beating the MSCI US Investable Market Real Estate 25/50 Index, which is light on industrial REIT ETFs, by about 300 basis points this year.
“We anticipate that industrial REITs will wait out the short-term trade turbulence, but the long-term outlook for the sector remains sunny. Industrial real estate performed well in the last decade—catalyzed by the rise of e-commerce and increased demand for omnichannel and last-mile delivery,” according to Commercial Property Executive.
Invesco KBW Premium Yield Equity REIT ETF (KBWY)
Expense Ratio: 0.35%
When the typical real estate ETF yield will not do, investors thirsty for higher levels of income can consider the Invesco KBW Premium Yield Equity REIT ETF (NASDAQ:KBWY). KBWY, which holds 29 real estate stocks and tracks the KBW Nasdaq Premium Yield Equity REIT Index , has a 12-month distribution rate of just over 7%.
In addition to that high income stream, KBWY is attractive for another reason: this fund can be used as a complement to traditional real estate ETFs, which are often large-cap heavy. The average market value of KBWY’s components is $2.4 billion, putting this fund barely in mid-cap territory.
Nearly two-thirds of KBWY’s holdings are classified as value stocks, giving investors a real estate avenue for a rebound in the value factor.
U.S. Diversified Real Estate ETF (PPTY)
Expense Ratio: 0.53%
Having recently celebrated its first anniversary, the U.S. Diversified Real Estate ETF (NYSEARCA:PPTY<) is one of the newer funds in the category and is another alternative to traditional real estate ETFs.
“PPTY is a rules-based fund that uses stable geographic and property type targets to provide diversified exposure to U.S. real estate,” according to the issuer. “Our portfolio is constructed based on the actual properties held by each company in our investment universe. This focus on the underlying real estate allows PPTY to deliver consistent exposure and reliable diversification.”
About 51% of PPTY’s holdings are residential, office and industrial REITs. With location being a primary point in this fund’s REIT selection criteria, it is not surprising to see many of the higher-end U.S. real estate markets among the fund’s top 10 geographic exposures. For example, New York; Los Angeles; Washington, D.C.; and San Francisco combine for 34.2% of PPTY’s geographic weight. All of PPTY’s top 10 geographic exposures are U.S. cities.
Hoya Capital Housing ETF (HOMZ)
Expense Ratio: 0.45%
The Hoya Capital Housing ETF (NYSEARCA:HOMZ) debuted last month, but could be an interesting option for investors looking to capitalize on trends in residential real estate, including housing shortages.
HOMZ targets the Hoya Capital Housing 100 Index, which is a rules-based index “designed to track the companies with the potential to benefit from rising rents, appreciating home values, and a persistent housing shortage,” according to Hoya Capital.
Like some of the other real estate ETFs mentioned here, HOMZ is an alternative to traditional funds in this category. In addition to large weights to home furnishing and retail companies, HOMZ has above-average exposure to real estate technology companies, among other groups that are rarely represented in standard real estate ETFs.
NetLease Corporate Real Estate ETF (NETL)
Expense Ratio: 0.6%
The NetLease Corporate Real Estate ETF (NYSEARCA:NETL) is another new addition to the real estate ETF fray, having also debuted last month. As its name implies, NETL focuses on a strategy known as the net lease.
Under the net lease structure, “the tenant pays taxes, maintenance and insurance in addition to the monthly rent. This reduces the REITs’ exposure to rising operating expenses and helps make cash flows more predictable,” according to Nareit.
There are some tax benefits to that structure, as well as the potential for steady cash flow dependability, which serves as the backbone of rising dividends among REITs. Over 32% of NETL’s holdings are industrial and retail REITs. At the geographic level, this fund has some prime locations among fast-growing, low-tax states, as highlighted by a combined weight of 14.7% to Texas and Florida.
IQ US Real Estate Small Cap ETF (ROOF)
Expense Ratio: 0.70%
The IQ US Real Estate Small Cap ETF (NYSEARCA:ROOF) is a dedicated small-cap real estate ETF and lives up to that billing, as its 73 holdings had an average market value of $1.6 billion at the end of last year.
Owing to the defensive nature of real estate stocks, ROOF probably will not outperform traditional small-cap funds over long holding periods, but this real estate ETF is up an admirable 15% year-to-date. Plus, ROOF yields 6.5% — about five times the yield on the Russell 2000 Index.
ROOF allocates 39% of its combined weight to specialized and diversified REITs and another 34% to retail and office REITs.
As of this writing, Todd Shriber does not own any of the aforementioned securities.