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Q4 Outlook for REIT ETFs

After a strong performance last year, the real estate investment trust (REIT) space has lost ground this year, largely reflecting Fed-centric anxieties. The total return from the FTSE NAREIT All REITs Index decreased 4.52% for the year through Sep 30 against a 27.15% positive return in 2014. (Read: SPDR Financial ETFs-What are the Key Differences )

The group's recent weak performance notwithstanding, the outlook for REITs remains favorable. Fed uncertainty no doubt remains a dominant theme for the industry, but the central bank appears in no hurry to start the monetary policy normalization process, particularly following the recent bout of soft economic data.

The "bad data", ranging from weaker job additions in September, decline in the counts in the two ISM surveys, dip in Consumer Price Index (CPI) and weak manufacturing activity, have raised doubts about reaching the Fed's inflation rate target for a rate hike. Now October seems to be almost off the table and chances of a December hike are trending low, adding further cheer to the REIT space.

No doubt, REIT's dependence on debt for acquisitions, development and redevelopment activities make them gainers when rate remains low. Also, their dividend yield grabs investors' attention more than yields on fixed income and money market accounts in times like this. (Read: 4 ETFs for Income in Q4 )

But a low rate environment cannot be a perpetual one. While REITs (those having shorter leasing periods) with the power to adjust their rent quickly to a rate hike look quite bankable, the individual market dynamics of different asset types owned and managed by the REITs would be needed the most for the stocks to excel.

After all, everything is not possible virtually, and one will eventually need "real space" for economic activities. For this special hybrid class, this is their most fundamental strength, and their ability to boost shareholders' value through steady dividend payouts makes them all the more attractive. (Read: Enjoy Growth and Income with these Small Cap Value ETFs )

Dividends Still Standing Tall

The U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends. And as of Sep 30, 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%. Clearly, the REITs continue to offer decent yields and outpaced the 2.28% dividend yield offered by the S&P 500 as of that date.

Capital Access

Moreover, REITs have been proactive in the capital market in recent years leveraging on the low rate environment to improve their financials. As of Sep 30, REITs raised over $49.0 billion in initial, debt and equity capital offerings (IPOs - $1.4 billion, Secondary Common - $20.3 billion, Secondary Preferred - $2.1 billion and Secondary Debt - $25.3 billion). This indicates the rise in investors' confidence in this sector and their willingness to pour money into it.

Exploring the Sector Through ETFs

In this backdrop, we believe this is the right time to explore the sector through Exchange ETFs, so as to reap the benefits in a safer way. Considering the return prospects from dividend income and capital appreciation, we have tracked the following REIT ETFs, which could be worth considering:

Vanguard REIT ETF ( VNQ )

The fund, launched in 2004, seeks investment results by tracking the performance of the benchmark - MSCI US REIT Index - which is used to gauge real estate stocks. The fund consists of 145 stocks, which acquire office buildings, hotels, and other real property. The top three holdings are Simon Property Group Inc. (SPG), Public Storage (PSA) and Equity Residential (EQR) . It charges 12 basis points (bps) in fees (as of May 28, 2015). VNQ managed to attract $26.2 billion in assets under management till Oct 16, 2015.

iShares U.S. Real Estate ETF ( IYR )

Launched in 2000, IYR follows the Dow Jones U.S. Real Estate Index that measures the performance of the real estate industry of the U.S. equity market. The fund comprises 118 stocks with top holdings including Simon Property Group Inc., American Tower Corporation (AMT) and Public Storage (PSA). The fund's expense ratio is 0.43% (as of Aug 31, 2015) and the 12-month trailing yield is 3.94% (as of Sep 30, 2015). It has around $4.4 billion in assets under management as of Oct 16, 2015.

SPDR Dow Jones REIT ETF ( RWR )

Functioning since 2001, RWR seeks investment results of the Dow Jones U.S. Select REIT Index. The fund consists of 97 stocks that have equity ownership and operate commercial real estate, with the top holdings being Simon Property Group Inc., Public Storage and Equity Residential. The fund's expense ratio is 0.25% (as of Oct 19, 2015) and dividend yield is 3.21% (as of Oct 15, 2015). RWR has over $3.1 billion in assets under management (as of Oct 16, 2015).

Schwab US REIT ETF ( SCHH )

This fund debuted in 2011 and tracks the total return of the Dow Jones U.S. Select REIT Index. The fund consists of 97 stocks that own and operate commercial real estates. The top three holdings are Simon Property Group Inc., Public Storage and Equity Residential. It charges 7 bps in fees (as of Oct 9, 2015), while the trailing twelve month distribution yield is 2.39%. SCHH boasts $1.7 billion in assets under management (as of Oct 16, 2015).

First Trust S&P REIT Index Fund ( FRI )

Launched in May 2007, FRI is an ETF that seeks investment results of the S&P United States REIT Index, which gauges the U.S. REIT market and retains consistency, depicting the overall market composition. The fund comprises 157 stocks with the top holdings being Simon Property Group Inc., Public Storage and Equity Residential. The fund's net expense ratio is 0.50% (as of May 1, 2015) and the 12-month distribution rate is 2.73% (as of Sep 30, 2015). FRI has about $206.5 million in net assets under management (as of Oct 16, 2015).

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VIPERS-REIT (VNQ): ETF Research Reports

ISHARS-US REAL (IYR): ETF Research Reports

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

SCHWAB-US REIT (SCHH): ETF Research Reports

FT-SP REIT IDX (FRI): ETF Research Reports

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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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