Exchange traded funds tracking commercial real estate have outpaced the S&P 500 the past few years and more investors are gravitating to REIT ETFs for yield since interest rates are so low.
“REITs have historically earned returns between bonds and stocks due to their stable income streams and potential for capital appreciation,” said Daniel Farley, a senior managing director at State Street Global Advisors. “In the shorter term, our expected return models suggest that REITs have begun to look mildly expensive, but the appeal of their income features seems likely to foster continued support for the asset class in the current low interest environment.”
State Street manages SPDR Dow Jones REIT ETF (NYSEArca: RWR).
“Equity REITs are a hybrid asset class, offering yield and the possibility of capital appreciation,” according to Morningstar analyst Abby Woodham. “These firms generate income by managing properties and collecting rent. They are required to distribute at least 90% of their taxable income to shareholders, which is the source of their desirable yield. In the past, REITs were viewed as a liquid way to buy commercial real estate and improve a portfolio’s diversification. Real estate also has some inflation-hedging qualities.”
Next page: REIT fundamentals