The demand for yield is stronger than ever, evidenced by investors searching every corner of the market for income. The relatively higher yield generated by real estate investment trusts has been popular with retail investors piling into focused exchange traded funds.
“We believe continued growth in consumer spending will help drive positive retailer sentiment, which should result in greater store openings and expansions offsetting retailer bankruptcies and store closings – i.e., greater absorption,” S&P Capital IQ said in a research note.
The Vanguard REIT ETF (NYSEArca: VNQ) is up 14.4% year-to-date, while the iShares Dow Jones U.S. Real Estate Index Fund (NYSEArca: IYR) is up 15.6%. The popularity of focused ETFs is an example of the popularity of income-generating investments in this low yield environment. VNQ yields 3.06% while yields 3.29%. The Federal Reserve announced that low rates will be around until 2015. [ETF Spotlight: REITs]
According to S&P Capital IQ, the average second-quarter occupancy was up, from 62.4% to 93.4%. [Some of S&P’s Favorite Equity ETFs]
The research company suggests the iShares FTSE NAREIT Retail Capped Index Fund (NYSEArca: RTL) to gain exposure to some of the highest rated retail REITs. The ETF devotes nearly 22% of its weight to Simon Property. Kimco, Macerich and Weingarten combine for about 19 % of the ETF’s weight. The fund yields 2.03%. [REITs: Real Estate Investment Trusts for Income & Yield]
“We see funds from operations for the group advancing about 7.5 % in 2012 and 6 %in 2013; we are looking for particular strength at Weingarten, which should benefit from the absence of its industrial portfolio that had dragged down results, as well as Simon Property Group (+12 % expected in 2012) and Taubman Centers, Glimcher,” S&P said. “We expect that as earnings continue improving that management will continue boosting dividends, with typical payout ratios still considerably lower than before the financial crisis owing to a general desire among REITs to preserve liquidity.”
iShares FTSE NAREIT Retail Capped Index Fund
Tisha Guerrero contributed to this article.