The U.S. real estate sector is in the pink this year. Rising inflation, uptick in home prices, a still-wobbly job market and demand for higher yield amid ultra-low interest environment have led to this REIT boom.
Nuveen Short-Term REIT ETF ( NURE Quick Quote NURE - Free Report) has emerged as the best-performing real estate ETF of the year and has returned 35.3% this year. Against this backdrop, Hoya Capital launched a new real estate fund named RIET on Sep 22. Inside RIET
The Hoya Capital High Dividend Yield Index ("RIET Index") is a rules-based index designed to provide diversified exposure to 100 of the highest dividend-yielding real estate securities in the United States.
The multi-factor selection process incorporates a quality screen to pick real estate companies with lower leverage profiles and begins with the selection of “Dividend Champions" that offer higher dividend yield. Securities are then chosen based on dividend yield across 14 property sectors and 3 market capitalization tiers. The RIET Index Dividend Yield as of 8/31/2021 is 6.70%.
Mid-Cap REITs and small-cap REITs each make up about 30% of the fund. Dividend companies and large-cap REITs each make up about 15% of the fund. And preferred stocks take 10% of the fund. Healthcare Trust (1.62%), Iron Mountain (1.61%) and Public Storage (1.54%) are the top three holdings of the fund.
Hoya Capital also announced a fee waiver for RIET, lowering the net expense ratio to 0.25% from 0.50% until at least September 30, 2022, providing immediate value to investors at launch.
How Does It Fit in a Portfolio?
The current economic backdrop is favorable for an inflation comeback thanks to easy comparison caused by the coronavirus crisis, the re-opening of the economy and persistent supply constraints. In a rising inflation environment, real estate stocks act as a good bet. Both, resale value of the property and rental income, rise with price inflation.
Some specific categories within REITs like shopping centers, apartments and self-storage have shown promise lately, as they benefit from reopening. Residential and commercial real estate rents are strongly rebounding this year, after last year’s plunge due to the pandemic.
The U.S. homebuilding sector is on fire. But higher demand for home buying as well as lack of labor and land has boosted home prices. This has boosted the demand for renting as fast-rising home prices are keeping many first-time home buyers away from the ownership. If this was not enough, a stupendous tech rally has been aiding the data center REITs in recent times.
A general low-rate environment is great for real estate stocks and ETFs as these are high-yielding in nature. The benchmark U.S. 10-year treasury yield was 1.41% on Sep 23. Hence, one can understand how high the dividend yield of RIET is.
While the space is teeming with products, RIET’s real competition will be with high dividend yielders. There are about four real estate ETFs that are yielding in the range of 6%. Those are
VanEck Mortgage REIT Income ETF ( MORT Quick Quote MORT - Free Report) (yield 6.99%), Global X SuperDividend REIT ETF ( SRET Quick Quote SRET - Free Report) (yield 6.57%), iShares Mortgage Real Estate ETF ( REM Quick Quote REM - Free Report) (yield 6.16%) and Invesco KBW Premium Yield Equity REIT ETF ( KBWY Quick Quote KBWY - Free Report) (yield 5.95%). But most products charge higher than RIET as MORT, SRET, REM and KBWY charge around 40 bps, 58 bps, 48 bps and 35 bps.