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Inside the New REIT Select Sector SPDR ETF

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State Street Global Advisors ("SSGA") has added a new member to its well known suite of SPDR Select Sector ETFs and this time it's related to real estate investment trusts or REITs based in the U.S. Before this, the asset manager has mostly offered international REIT ETFs, two based on Dow Jones index es and one on an MSCI index. Its U.S. based REIT ETF so far only includes SPDR Dow Jones REIT ETF ( RWR ) (read: Worried About Looming Rate Hike? Try this Ex-US REIT ETF ).

Since its launch in 1998, SSGA's SPDR sector suite has gathered over $84 billion in assets. The suite boasts very low fees as the asset manager has been able to cut its expenses over time "as more and more institutional and now individual investors have incorporated Sector SPDRs into their investment strategies," said Dan Dolan, Director - Wealth Management Strategies, Select Sector SPDR Trust.

The new Real Estate Select Sector SPDR fund, trading under the symbol XLRE , has been launched on October 7 keeping in mind the revisions to the Global Industry Classification Standard (GICS) announced by S&P Dow Jones Indices. The revisions will be implemented in August 2016 and it will set new rules of indexing and classification of firms included in the indexing.

Let's delve a little deeper into this newly launched ETF (see all Real Estate ETFs here).

XLRE in Details

XLRE tracks the performance of the Real Estate Select Sector Index, which includes securities of companies from real estate management, development and REITs, excluding mortgage REITs. The ETF comprises 26 stocks with top holdings including Simon Property Group Inc. ( SPG ), American Tower Corporation ( AMT ) and Public Storage ( PSA ), having shares of 12.69%, 8.32% and 6.75%, respectively. The fund is highly concentrated in its top 10 holdings, which account for 60.85% of the assets.

As far as sector allocation is concerned, specialized REITs, retail REITs and residential REITs hold the top three spots in the fund with allocations of 30.15%, 23.16% and 15.34%, respectively.

The fund charges 14 bps in fees from investors per year. Its underlying index has a dividend yield of 3.37% (read: A Comprehensive Guide to REIT ETFs ).

How Does it Fit in a Portfolio?

After the weak September U.S. job data, the most recent inflation data from China and retail sales and producer prices data from the U.S. delayed the prospect of an interest rate hike by the Fed. This means that REITs will continue to draw leverage from the near zero interest rate in nearly a decade for refinancing their debts.

While the continuity of a low rate environment is now anticipated for an extended period, such an environment cannot be a perpetual one. Even when the rates do eventually move up, REITs with the power to adjust their rents relatively quickly will be better placed. Notable among these are hotel REITs, self-storage REITs and apartment REITs that offer short-term leases.

This apart, the capability to generate higher dividend yields also makes the investment case for REITs very strong amid global uncertainties, both in the money and commodities markets. This is especially true when treasury yields are hovering near its lowest level since April and is down from its peak of 2.5% in June.

In fact, the dividend yield of REITs came in better than the market. As of September 30, 2015, the dividend yield of the FTSE NAREIT All REITs Index was 4.44% while the yield of the FTSE NAREIT All Equity REITs Index was 3.97%. With this, REITs outstripped the 2.28% dividend yield offered by the S&P 500 (read: REIT ETFs for Income and Diversification ).

ETF Competition

XLRE definitely holds promise being a member of the SPDR sector suite and built in accordance with the revised GICS standard. Still, there are a number of U.S.-based ETFs that are worth mentioning. A couple of top U.S. real estate funds include Vanguard REIT ETF ( VNQ ) and iShares U.S. Real Estate ETF ( IYR ).

VNQ tracks the MSCI US REIT Index, consisting of 145 stocks of publicly traded equity REITs. Its top three holdings include Simon Property Group, Public Storage and Equity Residential ( EQR ). It has a huge asset base of nearly $26 billion and focuses most on retail REITs, comprising about one-fourth of the fund's assets, followed by Residential REITs.

On the other hand, IYR tracks the Dow Jones U.S. Real Estate Index, holding 118 REIT stocks. Its top three holdings include Simon Property Group, American Tower and Public Storage. It has amassed about $4 billion in assets and gives the highest preference to specialized REITs (nearly one-fourth), followed by Retail REITs.

However, VNQ looks attractive than IYR on both the cost and yield fronts. VNQ charges 12 bps in fees and has a dividend yield of 3.97% while IYR charges 43 bps in fees and has a dividend yield of 3.80% (as of October 15, 2015) (read: Four REIT ETFs to Buy After the Weak Jobs Report ).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days . Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

SPDR-RE SELS (XLRE): ETF Research Reports

SPDR-DJ W REIT (RWR): ETF Research Reports

VIPERS-REIT (VNQ): ETF Research Reports

ISHARS-US REAL (IYR): ETF Research Reports

SIMON PROPERTY (SPG): Free Stock Analysis Report

PUBLIC STORAGE (PSA): Free Stock Analysis Report

AMER TOWER CORP (AMT): Free Stock Analysis Report

EQUITY RESIDENT (EQR): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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