Real Estate ETFs: Performance Perking Up

The NETLease Corporate Real Estate ETF (NETL) and the VanEck Office and Commercial REIT ETF (DESK) were the top two best performers over the past month – followed by the ALPS REIT Dividend Dogs ETF (RDOG). RDOG applies a “Dogs of the Dow theory” approach. Itoffers equally weighted exposure to the top 10 highest-yielding domestic REITs on the market. The fund charges an expense ratio of 0.35%.

Real estate ETF flows also snapped a four-month losing streak in June. Six out of 11 of the most popular alternative ETFs were tied to real estate – granted, the flows were fairly modest. REITs have historically had limited correlation to the broader markets and boast special tax status. To qualify as a REIT, a company must pay out at least 90% of its taxable income to shareholders annually in the form of dividends.

Topping the charts were the iShares U.S. Real Estate ETF (IYR) and the Real Estate Select Sector SPDR Fund (XLRE) – which has seen more than $600 million in net inflows year-to-date and focuses on real estate development and long-term property management, effectively mirroring the S&P Real Estate Sector Index. Nearly 30% of XLRE’s assets are invested in telecom and data center sectors, making the fund well positioned for long-term growth. The fund offers a dividend yield of 3.7% and has an expense ratio of 0.09%, one of the cheapest of its kind.

The Avantis Real Estate ETF (AVRE), which charges 0.17% and takes a much broader approach with 291 holdings, also did well.

Reemerging from the Rut?

Investors have recently turned their attention to battered, rate-sensitive pockets of the market to broaden their holdings beyond big tech. In fact, real estate stocks were the most overbought equities last week, along with regional banks. Names like American Tower, Kimco Realty and Prologis all rallied more than 5% apiece. They all have an RSI, or relative strength index, of 70 or more – indicating extreme overbought conditions. Even with those gains, the real estate sector is still down 25% from historic highs seen in 2022. It is trading at a significant discount to fair value.

The sector is also finding tailwinds among easing monetary policy across the globe. Additionally, there is more stability in private real estate pricing and even in long-term demographic trends. Office space may be diminishing, but other facets of real estate are gaining traction, including residential, industrial and health care. Several real estate giants have also raised full-year earnings guidance on a stronger forecast for the second half.

Mortgage rates are also modestly slipping. Right now, the average rate on a 30-year fixed mortgage is hovering well below its 52-week high of 7.8%. The modest downtrend is helping lift housing sentiment. Homeowners locked into previous lower rates might finally decide to sell, adding much-needed inventory back to the market.

More Ways to Gain REIT Exposure

The $35 billion Vanguard Real Estate Index Fund (VNQ) is the largest and most liquid real estate ETF by a mile – with has 154 holdings and positive net inflows for the year. The fund is primarily composed of retail, industrial and telecom tower REITs. Additionally, it has strong data center exposure and minimal office REIT exposure. Top holdings include Prologis, American Tower Corporation, Equinix, Simon Property Group and Digital Realty Trust.

The Schwab U.S. REIT ETF (SCHH) is the cheapest on the market, charging 0.07% and tracking an index of 119 holdings all capped at a 10% weighting. Such a structure can allow for better risk mitigation at the cost of tempered performance. Nevertheless, the fund is well diversified on both a geographic and real estate class level.

For those looking to round out their REIT exposure with opportunities abroad, international REIT funds like Vanguard Global ex-U.S. Real Estate ETF (VNQI) and Xtrackers International Real Estate ETF (HAUZ) could pair nicely with products that are focused solely on U.S. REITs.

High hopes for a new rate-cutting regime and a healthy rebound in housing have bolstered sentiment toward real estate. REIT ETFs present a compelling opportunity for investors seeking to diversify their portfolios. They also benefit from the sector's potential long-term recovery.

For more news, information, and analysis, visit VettaFi | ETF Trends.

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