After a poor showing last year, real estate investment trust exchange traded funds are outpacing the broader markets and could continue to outshine common stocks.
Year-to-date, the Vanguard REIT ETF (NYSEArca: VNQ) has gained 13.7%, iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) rose 11.8% and SPDR Dow Jones Reit ETF (NYSEArca: RWR) increased 14.3%. In comparison, the S&P 500 Index has only inched up 2.6% so far this year. [Rate-Sensitive REIT ETFs Rebound]
Real estate observers argue that that REITs have further room to run as consumer confidence and real estate prices continue to rise, reports Constance Gustke for CNBC.
“There’s room for more growth in REITs, since real estate will be stellar,” Bruce Garrison, a managing director at Chilton Capital Management, said in the article. “Construction levels are still relatively depressed.”
Within the REITs space, Garrison points to real estate for data-centers as a way to accommodate the growth in technology. For instance, he singles out the Digital Realty Trust (NYSE: DLR), which runs global data-center services. DLR has a small weight in diversified REIT ETFs, including 1.2% of VNQ, 2.0% of IYR and 1.4% of RWR.
David Rodgers, a senior real estate research analyst at Robert W. Baird, argues that U.S. industrial REITs will be one of the top performing sub-sectors this year. ETF investors can target this area with the iShares Industrial/Office Real Estate Capped ETF (NYSEArca: FNIO), which focuses on industrial and office space.
“Last year was the largest single vacancy decline for U.S. industrial properties, benefiting REITs,” Rodgers said. “So it’s an appropriate place to be.”
Wilson Magee, director of global real estate at Franklin Templeton, believes that self-storage units and lodgings will benefit from the economic recovery. While there are no self-storage-specific REIT ETFs on the market, the sub-sector is found in diversified REIT ETFs. For instance, RWR has a 7.4% weight in self-storage REITs and 7.0% in hotels.
Additionally, health care picks may be a value play in the REITs category, according to Morningstar. Short-term risk is relatively negated as many health-care REITs have long-term leases, Todd Lukasik, Morningstar REIT analyst, said. Lukasik singled out HCP (NYSE: HCP) and Ventas (NYSE: VTR) as examples of strength. The two companies are among the largest holdings in diversified REIT ETFs. VNQ has a 3.2% weight in both HCP and VTR; IYR has a 5.6% allocation toward HCP and 5.6% in VTR; and RWR includes 3.9% in HCP and 4.0% in VTR.
“So REIT cash flow should continue to grow,” Lukasik said. “Also, tens of millions more people who are joining the ranks of the insured should drive demand.”
For more information on real estate investment trusts, visit our REITs category.