Given the slightly improved economic picture, and mild declines
in unemployment, many investors may assume that housing would
finally be back on track. However, the U.S. residential property
market has been mixed at best as recent readings of the S&P
Case Shiller Home Price Index showed month-over-month
declines of about 0.5%
while year-over-year prices tumbled by about 4% in comparison. This
data contrasts sharply with some of the other housing figures
investors have seen lately-specifically, inventory levels and
existing home sales-which suggested to some that a recovery was
finally underway in the sector.
Obviously, that idea is now seriously in question with the
latest Case Shiller reading, pushing many to wonder if housing
really is approaching a bottom or not. Yet, despite all the ills in
the residential sector, signs of life are starting to appear in the
commercial space instead. The National Association of Realtors
predicts that vacancy rates
will decline slightly across all segments of the market this year
including a nearly one percent drop in industrial and retail
markets. Add this to solid gains in the Society of Industrial and
Office Realtors CRE Index-which is finally on the upswing although
still subdued overall-and investors may be better served by playing
real estate via the commercial sector (see
Three ETFs With Incredible Diversification
).
In addition to arguably better fundamentals, commercial real
estate can also offer up valuable diversification benefits as well.
This is because most investors are already exposed to the
residential market via their homes, but most do not have a similar
allocation to commercial properties as well. Thanks to this, some
assets in commercial real estate could help to give investors a
more well-rounded outlook on the broader sector (read
Follow Buffett With These Developed Market Bond
ETFs
).
While there are a few stocks and bonds that can offer up quality
exposure to the space, an ETF could be the way to go in this
market. That is because a fund will help to spread holdings around
a variety of geographies and nearly eliminate company specific risk
as well. This can be ideal if commercial real estate dips back or
if the current trends in the market do not hold up and some
providers are left with heavy losses. As a result, a closer look at
either of the following two ETFs could be appropriate for investors
seeking more exposure to the commercial side of the real estate
market:
iShares FTSE NAREIT Industrial/Office ETF (
FNIO
)
While pretty much all real estate ETFs have at least some
exposure to the commercial real estate market, FNIO is the only one
that focuses exclusively on this segment. This is done by tracking
the FTSE NAREIT Industrial/Office Capped Index which produces a
fund that charges investors 48 basis points a year in fees and
holds 30 securities in its basket. Top holdings include
ProLogis (
PLD
)
and
Boston Properties (
BXP
)
which both make up about 18% of the fund. In terms of market cap
breakdowns, the fund is pretty spread out as large and small cap
stocks each make up about 37% of FNIO. While the yield is pretty
solid at 3.2%, volume and AUM is pretty light, suggesting that wide
bid ask spreads may be inherent in this fund (read
Small Cap Real Estate ETFs: Crushing The
Competition
).
iShares Barclays CMBS Bond Fund (
CMBS
)
If investors are still unsure about equities but want quality
exposure to the commercial real estate market, CMBS looks to be a
great choice. The product tracks the Barclays Capital U.S. CMBS
(ERISA Only) Index which follows a benchmark of commercial
mortgage-backed securities. These notes generally consist of a
number of commercial real estate mortgages across a variety of
sectors in this space. They are similar to residential
mortgage-backed securities but due to the structure of the
commercial market, commercial bonds often carry less in prepayment
risks than their residential counterparts (see
Top Three High Yield Real Estate ETFs
).
For investors who are intrigued by this approach-and fixed
income investors should be considering that CMBS securities make up
a very small portion of broad bond funds-a few more points should
be noted. The fund charges just 25 basis points a year in fees but
holds just about 30 securities in its basket. Also, volume and AUM
is pretty low, but the product is still young, having debuted in
mid-February. Nevertheless, the fund's holdings include a series of
bonds which have coupons in the 5.4%-5.8% range that mature over
the next few years, suggesting low default risks in this corner of
the market.
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BXP
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PLD
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