REIT ETFs Keep The Good Times Going

With assistance from investor's seemingly unquenchable thirst for income and the Federal Reserve's refusal to raise interest rates to this point in 2016, this has been a banner year for real estate investment trusts (REITs) and the corresponding exchange-traded funds.

For example, the Vanguard REIT Index Fund VNQ and the iShares Dow Jones US Real Estate (ETF) IYR, two of the largest REIT ETFs, are up an average of 15 percent year-to-date. Stellar performances by these and other REIT ETFs is about more than just lower for longer interest rates and demand for yield.

Lucky No. 11

As has been previously noted in this space, in November 2014, the S&P Dow Jones Indices and MSCI, two of the largest providers of benchmarks for exchange-traded funds, said real estate would become the eleventh Global Industry Classification Standard (GICS) sector in August 2016.

Related Link: REIT ETFs Rising Ahead Of Sector Separation

That means many active managers who benchmark to the S&P 500 or some widely MSCI indices will need to account for real estate as the eleventh sector by increasing exposure to those stocks. It is fair to say many managers of active mutual funds are currently underweight real estate, and when real estate becomes its own sector at the end of August, those managers will be pressed into buying real estate stocks to bring their portfolios in line with the benchmarks they are attempting to beat.

“While S&P Global Market Intelligence thinks real estate securities are in many actively managed mutual funds ahead of the pending GICS sector of REITs in the S&P 500 in mid-September, passively managed securities providing exposure to the segment had $51 billion in assets at the end of June, boosted by consistent net inflows in the first six months,” said S&P Capital IQ in a note out Tuesday.

The research firm has a Market-Weight rating on VNQ.


“VNQ focuses on companies that own traditional real estate such as self-storage-focused Public Storage PSA and health care focused Welltower Inc HCN, while IYR holds those companies but includes specialty communications focused REITs such as American Tower Corp AMT and Crown Castle International CorpCCI among its largest positions,” added S&P Capital IQ.

IYR, the iShares REIT ETF, allocates nearly 10 percent of its weight to healthcare REITs and almost 27 percent to specialized REITs. Healthcare REITs have recently been prodigious generators of funds from operations (FFO), a key metric in evaluating a REIT's ability to pay and raise dividends.

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