The Federal Reserve keeps insisting it is not in a hurry to boost interest rates. The exact timetable for higher rates in the U.S. remains to be seen, but 10-year Treasury yields have tumbled 14.4% this year.
Predictably, that has been goods for scores of exchange traded funds tracking rate-sensitive asset classes, such as real estate investment trusts (REITs). Year-to-date, the Vanguard REIT ETF (NYSEArca: VNQ), the largest REIT ETF, is up 13.6% and just two ETFs have added more new assets than VNQ. [Sector ETFs Grow as Investors Get Tactical]
Investors considering REIT ETFs should not overlook the Guggenheim Wilshire US REIT ETF (NYSEArca: WREI). Proving that good things often come in small packages in the world of ETFs, WREI has just under $19 million in assets under management, but the fund has surged 19.6% year-to-date.
The cap-weighted WREI, which debuted in March 2010, tracks the Wilshire US Real Estate Investment Trust Index, a derivative of the Wilshire 5000 Total Market Index.
With yield hunters delving into alternative segments of the market in search of income, WREI is a credible idea with a trailing 12-month yield of 2.87%, more than 30 basis points above 10-year Treasuries, according to Guggenheim data. Companies have to pay out 90% of its taxable income to shareholders as dividends to qualify as a REIT.
Solid fundamentals have boosted REIT ETFs, including WREI, this year. Demand for commercial space has soared with the average occupancy rate across all REIT portfolios is now at 93.6%, near its last occupancy-rate peak of 94.3% in 2007. [Solid Fundamentals for REIT ETFs]
WREI features exposure to health care REITs, hotels & resort REITs, industrial REITs, office REITs, residential REITs, retail REITs and specialized REITs.
In addition to interest rate risk, some analysts believe REITs are richly valued after soaring this year. WREI seems to fit the bill with a P/E ratio of 51 at the end of the second quarter, according to Guggenheim data.
On an adjusted funds from operations basis, a metric for valuing REITs, the asset class looks expensive. However, relative to bonds, an asset class some investors often use REITs in place of, REITs are attractively valued. That indicates WREI could continue making new highs. WREI is up 2.5% over the past month.
Guggenheim Wilshire US REIT ETF