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The real estate sector has been showing solid strength so far this year with the broad U.S. REIT index — FTSE Nareit Equity REITs Index — climbing 22.8% compared to the 18.1% gain for the S&P 500 Index. The outperformance was powered by lower interest rates and improving economic conditions (read: 5 Reasons Why REIT ETFs Are Surging).
Lower rates have made buying of real estate and refinancing mortgages more affordable. This, in turn, is boosting activity in the market and real estate stocks. Meanwhile, the U.S. economy returned to the pre-pandemic level with GDP rising 6.5% annually in the second quarter, indicating a sustained recovery from the pandemic recession. With rapid vaccination, business reopenings and trillions of dollars of government stimulus, many analysts expect the economy to grow at a robust pace of around 7% for all of 2021. That would represent the strongest calendar-year growth since 1984 and a sharp reversal from last year’s worst 3.4% economic contraction in 74 years.
Growth in the economy translates into greater demand for real estate, higher occupancy levels and landlords’ greater power to ask for higher rents. Uptick in home prices is also driving the real estate sector higher as more consumers are moving toward rental. Additionally, REITs have benefited from inflation concerns as it is often considered a hedge against inflation.
Further, rising Delta variant of COVID-19 cases has raised the appeal for these assets. This is because these often act as a safe haven in times of market turbulence and concurrently offer higher returns due to their outsized yields. 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, we have highlighted five ETFs that have been leading the space and exhibiting strong momentum. Any of these could be excellent picks for investors seeking to benefit from the current market environment (see: all the Real Estate ETFs here).
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 the other sectors. It has amassed $61.4 million in its asset base and trades in an average daily volume of 35,000 shares. The ETF holds 35 stocks in its basket and charges 35 bps in fees per year (read: 2 Sector ETFs Hovering Around All-Time Highs).
Invesco S&P 500 Equal Weight Real Estate ETF – Up 34%
With AUM of $80.6 million, this ETF equally weighs stocks in the real estate sector of the S&P 500 Index by tracking the S&P 500 Equal Weight Real Estate Index. It holds 30 stocks in its basket and charges 40 bps in annual fees. The product trades in an average daily volume of 32,000 shares and has a Zacks ETF Rank #4 (Sell).
iShares Residential and Multisector Real Estate ETF (REZ - Free Report) – Up 33.1%
This fund offers exposure to the U.S. residential real estate sector and follows the FTSE Nareit All Residential Capped Index. It has AUM of $814 million and holds 30 stocks in its basket. The ETF has 0.48% in expense ratio and an average daily volume of 81,000 shares. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Real Estate Select Sector SPDR Fund (XLRE - Free Report) – Up 29.9%
This fund provides exposure to companies from real estate management and development and REITs, excluding mortgage REITs by tracking the Real Estate Select Sector Index. With AUM of $4 billion, it holds 32 stocks in its basket and charges 12 bps in annual fees. XLRE has a Zacks ETF Rank #4 with a High risk outlook.
This ETF follows the Dow Jones U.S. Select REIT Index, holding 114 stocks in its basket. It has amassed $1.9 billion in its asset base while trades in volume of 151,000 shares per day on average. The fund has a Zacks ETF Rank #3 with a Medium risk outlook.
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5 Real Estate ETFs Outperforming S&P 500
The real estate sector has been showing solid strength so far this year with the broad U.S. REIT index — FTSE Nareit Equity REITs Index — climbing 22.8% compared to the 18.1% gain for the S&P 500 Index. The outperformance was powered by lower interest rates and improving economic conditions (read: 5 Reasons Why REIT ETFs Are Surging).
Lower rates have made buying of real estate and refinancing mortgages more affordable. This, in turn, is boosting activity in the market and real estate stocks. Meanwhile, the U.S. economy returned to the pre-pandemic level with GDP rising 6.5% annually in the second quarter, indicating a sustained recovery from the pandemic recession. With rapid vaccination, business reopenings and trillions of dollars of government stimulus, many analysts expect the economy to grow at a robust pace of around 7% for all of 2021. That would represent the strongest calendar-year growth since 1984 and a sharp reversal from last year’s worst 3.4% economic contraction in 74 years.
Growth in the economy translates into greater demand for real estate, higher occupancy levels and landlords’ greater power to ask for higher rents. Uptick in home prices is also driving the real estate sector higher as more consumers are moving toward rental. Additionally, REITs have benefited from inflation concerns as it is often considered a hedge against inflation.
Further, rising Delta variant of COVID-19 cases has raised the appeal for these assets. This is because these often act as a safe haven in times of market turbulence and concurrently offer higher returns due to their outsized yields. 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, we have highlighted five ETFs that have been leading the space and exhibiting strong momentum. Any of these could be excellent picks for investors seeking to benefit from the current market environment (see: all the Real Estate ETFs here).
Nuveen Short-Term REIT ETF (NURE - Free Report) – Up 35.5%
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 the other sectors. It has amassed $61.4 million in its asset base and trades in an average daily volume of 35,000 shares. The ETF holds 35 stocks in its basket and charges 35 bps in fees per year (read: 2 Sector ETFs Hovering Around All-Time Highs).
Invesco S&P 500 Equal Weight Real Estate ETF – Up 34%
With AUM of $80.6 million, this ETF equally weighs stocks in the real estate sector of the S&P 500 Index by tracking the S&P 500 Equal Weight Real Estate Index. It holds 30 stocks in its basket and charges 40 bps in annual fees. The product trades in an average daily volume of 32,000 shares and has a Zacks ETF Rank #4 (Sell).
iShares Residential and Multisector Real Estate ETF (REZ - Free Report) – Up 33.1%
This fund offers exposure to the U.S. residential real estate sector and follows the FTSE Nareit All Residential Capped Index. It has AUM of $814 million and holds 30 stocks in its basket. The ETF has 0.48% in expense ratio and an average daily volume of 81,000 shares. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Real Estate Select Sector SPDR Fund (XLRE - Free Report) – Up 29.9%
This fund provides exposure to companies from real estate management and development and REITs, excluding mortgage REITs by tracking the Real Estate Select Sector Index. With AUM of $4 billion, it holds 32 stocks in its basket and charges 12 bps in annual fees. XLRE has a Zacks ETF Rank #4 with a High risk outlook.
SPDR Dow Jones REIT ETF (RWR - Free Report) – Up 29.7%
This ETF follows the Dow Jones U.S. Select REIT Index, holding 114 stocks in its basket. It has amassed $1.9 billion in its asset base while trades in volume of 151,000 shares per day on average. The fund has a Zacks ETF Rank #3 with a Medium risk outlook.