Investors hungry for yield have shoveled a record amount of cash into mutual funds and exchange traded funds that invest in real estate investment trusts.
Vanguard REIT ETF (NYSEArca: VNQ) is up 1.3% year-to-date; the fund has a 12-month yield of 3.41%. SPDR Dow Jones REIT ETF (NYSEArca: RWR) is up 1.93% year-to-date; the fund has a 12-month yield of 3.01%.
The S&P 500 is down about 5% so far in 2011. [Dividend ETFs in Focus]
According to Citigroup Global Markets, investors allocated $3.7 billion into mutual funds that invest in U.S. real estate investment trusts this year, the most new money added since 2006, report Oshrat Carmiel and Margaret Collins for Bloomberg. Total assets in the sector funds, including ETFs, are at a record $96 billion. [ETF Investors Take on More Risk in Search of Reward]
Most REITs are publicly traded firms that own and operate physical properties. The companies need to distribute at least 90% of their income to shareholders in the form of dividends.
“REITs are attracting attention because of their income, the dividend yield, and the fact that REITs do own hard assets, which offer inflation protection,” Philip Martin, Morningstar REIT strategist, remarked.
Larry Glazer, a managing partner at Mayflower Advisors, notes that investors are looking to REIT yields because they have become “so starved for income.” According to the Bloomberg REIT Index, REITs had an average dividend yield of around 3.7%, compared to yields on 10-year Treasury notes of a little under 2% and the near zero returns on most money market funds. Additionally, annual dividend growth may likely range between 4% to 6% over the next several years, Martin added.
“REITs could continue to attract modest amounts of capital given low interest rates,” Michael Bilerman, head of the real estate and lodging team at Citi Investment Research & Analysis, commented.
Those who believe another deep U.S. recession is looming would naturally want to avoid this asset class as an economic pullback would diminish demand for commercial office space, increase vacancies and reduce cash flows from properties.
Vanguard REIT ETF
For more information on real estate investment trusts, visit our REITs category.
Max Chen contributed to this article.