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The real estate sector has been enjoying a huge rally on the dual tailwinds of accelerating economic growth and Fed’s accommodative stance. Additionally, a resurgence in the number of COVID-19 cases led to investors’ flight to a defensive sector like real estate.
The strong trend is likely to stay here for at least in the short term. Below, we have highlighted some solid reasons for their outperformance:
Economic Growth
The domestic economy is on a faster recovery path buoyed by rapid COVID-19 vaccinations, continued progress in more COVID-19 vaccines, and a huge stimulus. The International Monetary Fund (IMF) projects that the United States is likely to become the engine of global economic growth this year. The agency, in its latest update, upgraded the U.S. economic growth forecast from 5.1% to 6.4% for this year, marking the strongest growth in decades (read: Recovering Economy Drives Bets for S&P 500 ETFs).
All these factors are brightening the prospect of the real estate sector. This is because growth in the economy translates into greater demand for real estate, higher occupancy levels and landlords’ greater power to ask for higher rents.
Dovish Fed
Although the Federal Reserve upgraded the outlook for the economy and inflation, it still pledged to provide easy policies through ultralow interest rates and large monthly bond purchases to provide support to the economy. It reiterated its commitment to maintain lower rates near zero through 2023. This means that cheap money will flow for more quarters to come, resulting in more spending power.
The low interest rate environment has been lending strong support to the real estate sector, pushing stocks higher. Lower rates have made buying of real estate or homes and refinancing mortgages more affordable. This, in turn, is boosting activity in the market and lifting real estate stocks.
However, the rise in Treasury yields due to inflationary pressures might hurt the rally. The Fed said the U.S. economy would temporarily see "a little higher" inflation this year as activity strengthens and supply constraints push up prices in some sectors.
Defensive Approach
The raging pandemic could derail the ongoing economic recovery. Meanwhile, President Joe Biden's proposal to make historic hike in capital gains tax also made investors jittery. This has raised the appeal for the stocks in the real estate sector. This is especially true as these often act as a safe haven in times of market turbulence and concurrently offer higher returns due to their outsized yields (read: Worried About Tax Hike and Surging Yields? 5 ETFs to Bet On).
REITs own and operate income-producing real estate. They are required to distribute at least 90% of taxable income to shareholders annually in the form of dividends and, in turn, can deduct those dividends paid from their corporate taxable income. Thus, REITs offer juicy dividend yields. Further, REITs have a low correlation with other stocks and bonds, thereby providing huge diversification benefits to the portfolio.
Given the bullish fundamentals, many real estate ETFs are hitting new one-year highs. Below, we have highlighted those five funds that have been leading the space and exhibiting strong momentum. Any of these could be excellent picks for investors seeking to benefit from a defensive flight and a lower rate environment. Investors should note that our ranking system takes into account the asset class outlook, which is negative for real estate and hence most ETFs in this space have a Zacks Rank #4 (Sell) (see: all the Real Estate ETFs here).
This fund aims to offer investors exposure to sustainable income with identifiable growth through investments in Net Lease REITs. This can easily be done by tracking the Fundamental Income Net Lease Real Estate Index.
This fund tracks the Dow Jones U.S. Select Short-Term REIT Index, which 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 have shorter lease terms than REITs that invest in other sectors.
Image: Bigstock
Real Estate ETFs Scaling to New Highs
The real estate sector has been enjoying a huge rally on the dual tailwinds of accelerating economic growth and Fed’s accommodative stance. Additionally, a resurgence in the number of COVID-19 cases led to investors’ flight to a defensive sector like real estate.
The strong trend is likely to stay here for at least in the short term. Below, we have highlighted some solid reasons for their outperformance:
Economic Growth
The domestic economy is on a faster recovery path buoyed by rapid COVID-19 vaccinations, continued progress in more COVID-19 vaccines, and a huge stimulus. The International Monetary Fund (IMF) projects that the United States is likely to become the engine of global economic growth this year. The agency, in its latest update, upgraded the U.S. economic growth forecast from 5.1% to 6.4% for this year, marking the strongest growth in decades (read: Recovering Economy Drives Bets for S&P 500 ETFs).
All these factors are brightening the prospect of the real estate sector. This is because growth in the economy translates into greater demand for real estate, higher occupancy levels and landlords’ greater power to ask for higher rents.
Dovish Fed
Although the Federal Reserve upgraded the outlook for the economy and inflation, it still pledged to provide easy policies through ultralow interest rates and large monthly bond purchases to provide support to the economy. It reiterated its commitment to maintain lower rates near zero through 2023. This means that cheap money will flow for more quarters to come, resulting in more spending power.
The low interest rate environment has been lending strong support to the real estate sector, pushing stocks higher. Lower rates have made buying of real estate or homes and refinancing mortgages more affordable. This, in turn, is boosting activity in the market and lifting real estate stocks.
However, the rise in Treasury yields due to inflationary pressures might hurt the rally. The Fed said the U.S. economy would temporarily see "a little higher" inflation this year as activity strengthens and supply constraints push up prices in some sectors.
Defensive Approach
The raging pandemic could derail the ongoing economic recovery. Meanwhile, President Joe Biden's proposal to make historic hike in capital gains tax also made investors jittery. This has raised the appeal for the stocks in the real estate sector. This is especially true as these often act as a safe haven in times of market turbulence and concurrently offer higher returns due to their outsized yields (read: Worried About Tax Hike and Surging Yields? 5 ETFs to Bet On).
REITs own and operate income-producing real estate. They are required to distribute at least 90% of taxable income to shareholders annually in the form of dividends and, in turn, can deduct those dividends paid from their corporate taxable income. Thus, REITs offer juicy dividend yields. Further, REITs have a low correlation with other stocks and bonds, thereby providing huge diversification benefits to the portfolio.
Given the bullish fundamentals, many real estate ETFs are hitting new one-year highs. Below, we have highlighted those five funds that have been leading the space and exhibiting strong momentum. Any of these could be excellent picks for investors seeking to benefit from a defensive flight and a lower rate environment. Investors should note that our ranking system takes into account the asset class outlook, which is negative for real estate and hence most ETFs in this space have a Zacks Rank #4 (Sell) (see: all the Real Estate ETFs here).
NETLease Corporate Real Estate ETF (NETL - Free Report)
This fund aims to offer investors exposure to sustainable income with identifiable growth through investments in Net Lease REITs. This can easily be done by tracking the Fundamental Income Net Lease Real Estate Index.
Zacks ETF Rank: #3 (Hold)
52-Week High: $29.36
AUM: $89.6 million
Expense Ratio: 0.60%
1-Year Return: 68.6%
Global X SuperDividend REIT ETF (SRET - Free Report)
It follows the Solactive Global SuperDividend REIT Index and invests in 30 of the highest dividend-yielding REITs globally (read: 4 Sectors & Their ETFs Offering Great Value Now).
Zacks ETF Rank: N/A
52-Week High: $29.36
AUM: $482.1 million
Expense Ratio: 0.58%
1-Year Return: 62.4%
Nuveen Short-Term REIT ETF (NURE - Free Report)
This fund tracks the Dow Jones U.S. Select Short-Term REIT Index, which 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 have shorter lease terms than REITs that invest in other sectors.
Zacks ETF Rank: N/A
52-Week High: $32.29
AUM: $33.3 million
Expense Ratio: 0.35%
1-Year Return: 54.8%
Invesco S&P 500 Equal Weight Real Estate ETF
This ETF equally weights stocks in the real estate sector of the S&P 500 Index by tracking the S&P 500 Equal Weight Real Estate Index.
Zacks ETF Rank: #4
52-Week High: $34.83
AUM: $40.9 million
Expense Ratio: 0.40%
1-Year Return: 49.6%
iShares Residential Real Estate ETF (REZ - Free Report)
This fund offers exposure to the U.S. residential real estate sector and follows the FTSE Nareit All Residential Capped Index.
Zacks ETF Rank: #4
52-Week High: $79.81
AUM: $548.4 million
Expense Ratio: 0.48%
1-Year Return: 44.7%
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