The US real estate market has risen sharply again in many parts of the country as a result of the early spring coronavirus.
With a low in the US and other countries, investors are considering Real Estate Investment Trusts (REITs) as they tend to provide passive income from dividends and some capital appreciation. Despite these attractive features and the market, many REITs have failed to keep up with the encouraging recovery in the industry.
Here we'll break down key attributes to consider when investing in REITs and discuss two exchange-traded funds (ETFs) that should be on your radar:
What to Consider
While there may be differences in the definitions of real estate mutual funds in different countries, REIT's in general own, operate, or finance real estate that generates income. In the US, the law requires REITs to distribute at least 90% of their taxable income to shareholders annually. As a result, their dividends tend to be stable and juicy.
Since the early days of the pandemic, retail, leisure and office rental homes in particular have been the victims of the "stay at home, work from home" trends. Therefore, as the number of COVID-19 cases increases worldwide, the share prices of REITs that specialize in these subsectors could come under further pressure.
In the US, real estate investing generally offers consistent but low margins. The impact of the pandemic, particularly on several industrial sub-sectors, has resulted in a narrow margin.
What kind of REITs should long-term investors be looking for? We were going to research those REITs with strong business models, portfolios and balance sheets.
Another measure to monitor: Funds from Operations (FFO), which is used to define cash flow from operations. In the US, REIT & # 39; s calculate FFO in accordance with the standards set by the National Association of Real Estate Investment Trusts (NAREIT).
While most REITs may not be completely immune to the adverse economic impact of the pandemic in the future, the real estate sector is significantly important to most economies and investment portfolios.
Shares in these REITs can be bought and sold during a trading session like any other stock, but not all investors are willing to research individual companies in the industry such as Digital Realty Trust (NYSE :), Iron Mountain (NYSE :), Omega Healthcare Investors (NYSE :), Realty Income (NYSE :), Simon Property Group (NYSE 🙂 and Stag Industrial (NYSE).
Market participants looking for broad real estate exposure may consider ETFs instead.
1. Vanguard Real Estate ETF
Current price: $ 80.25
52 Week Range: $ 55.58 – $ 99.72
Dividend Yield: 3.71%
Expense Ratio: 0.12% per year, or $ 12 with an investment of $ 10,000
The Vanguard Real Estate Index Fund ETF Shares (NYSE 🙂 provides exposure to publicly traded real estate investment funds (REITs).
VNQ, which has 181 companies, follows the. The fund's top three sectors include specialty REITs (41.70%), residential REITs (13.60%), industrial REITs (11.80%), healthcare REITs (8.30%) and retail REITs (8.0%). Many of the specialized REITs come from the telecommunications and data center spaces, growing sub-divisions of the industry.
The fund's net assets are approximately $ 3.2 billion, with the top ten holdings accounting for more than 49.2% of that figure. The three biggest names are the Vanguard Real Estate II Index Fund (NASDAQ: VRTPX), American Tower (NYSE 🙂 and Prologis (NYSE :).
Year-to-date VNQ is down about 13%. However, since the March low, the fund is up more than 40%. Therefore, the fund is likely to take profits in the short term. Short-term technical analysis suggests that a price drop to the $ 75 level or even lower is possible, making the fund more attractive to long-term investors.
2. The Real Estate Select Sector SPDR Fund
Current Price: $ 35.55
52 Week Range: $ 24.88 – $ 42.00
Dividend Yield: 3.23%
Gross expense ratio: 0.13% per year, or $ 13 with an investment of $ 10,000
The Real Estate Select Sector SPDR Fund (NYSE 🙂 primarily provides exposure to REITs (97.92%) and to real estate management and development companies (2.08%), while mortgage -REIT & # 39; s are completely excluded.
XLRE, which has 31 holdings, tracks the Real Estate Select Sector index. The fund's net assets are approximately $ 3.2 billion, with the top ten holdings accounting for more than 65% of that figure. Top names include American Tower (NYSE :), Prologis (NYSE :), Crown Castle International (NYSE :), and Equinix (NASDAQ :).
So far this year, the fund is down about 8%. However, like the VNQ, it is up about 40% since early spring. A drop to 32.5 is possible in the coming weeks. Such a decline would provide a greater margin of safety for long-term investors.
Passive income-seeking market participants often prefer real estate mutual funds as they offer higher dividend yields than most broader indices or other sectors.
However, since REIT exchange-traded funds invest exclusively in the real estate sector, they can be more volatile than more broadly diversified equity funds. In fact, most of the REITs have seen significant declines at the start of the year and have not yet fully recouped all losses. Within their risk / return profiles, long-term investors may consider allocating some of their stake to REITs. Green shoots can emerge slowly in the industry.
Below are other REIT & # 39; s ETF & # 39; s we intend to cover in the coming weeks:
Global X SuperDividend® REIT ETF (NASDAQ 🙂
iShares Mortgage Real Estate Capped ETF (NYSE 🙂
Nuveen Short-Term REIT ETF (CBOE: NURE)
Pacer Benchmark Data & Infrastructure Real Estate SCTR (NYSE 🙂
ProShares Short Real Estate (NYSE 🙂
Schwab U.S. REIT ETF ™ (NYSE 🙂