Yield, Outperformance Attract Investors to Real Estate ETFs

December 18th at 8:07am by Tom Lydon

While investors have jumped into real estate investment trusts and exchange traded funds to cash in on the attractive yields, REITs prices have edged higher, causing some to take pause from a valuation standpoint.

The MSCI U.S. REIT Index has gained an average 19% per year over the past three years, including dividends, reports Tom Lauricella for the Wall Street Journal.

“U.S. REITs look less attractive to us now than they have over the last 10 years,” Richard Levine, one of the portfolio managers of the Neuberger Berman Equity Income Fund, said in the article. “As people have looked for the next source of yield they’ve found REITs, so they’ve done nicely. But that’s been pushing valuations to levels which are unattractive in some cases.”

REITs operate a range of real estate properties, such as hotels, hospitals, apartments and storage units, among others. To receive favorable taxes, REIT companies are required to distribute 90% of their taxable income to share holders, which is why REITs provide such attractive yields. [Mortgage REIT ETFs Fighting the Fed]

The asset class is typically valued in comparing prices to adjusted funds from operation, or AFFO, a type of net-income use for real estate. According to Green Street Advisors, REITs are trading at 18 times their stock prices using a three-year forward AFFO, compared to an average of 15 times since 1998.

While valuations may be a cause for concern, fund managers and analysts are not overly bearish. REITs still benefit from the low interest rate environment, little new construction and positive economic growth.

The REITs market has also benefited from the slowly recovering real estate market. Additionally, some investors have used commercial real estate as a way to hedge against inflation – as landlords, REITs operators can just raise the rents during inflationary periods. [‘Steady Diet’ of Real Estate ETFs Can Help Boost Yield]

Some REIT ETFs include:

  • Vanguard REIT ETF (NYSEArca: VNQ): 3.41% yield
  • SPDR Jow Jones REIT ETF (NYSEArca: RWR): 3.10% yield
  • iShares FTSE NAREIT Real Estate 50 Index Fund (NYSEArca: FTY): 3.66% yield
  • First Trust S&P REIT Index Fund (NYSEArca: FRI): 2.36% yield

For more information on real estate investment trusts, visit our REITs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.