The financial services sector and plenty of the corresponding exchange traded funds have significant time in investors’ doghouses this year, but the Financial Select Sector SPDR (NYSEArca: XLF) has recently perked up enough that it ranks as the fifth-best of the nine sector SPDR ETFs to this point in the year.
The brightest spots among financial services ETFs, and all sector funds for that matter, have been those funds dedicated to real estate investment trusts (REITs). With 10-year Treasury yields tumbling, plenty of REITs have impressed this year, but none as much as the iShares Residential Real Estate Capped ETF (NYSEArca: REZ).
REZ hit another all-time high last Friday and with a year-to-date gain of nearly 36%, the fund is 2014’s top-performing financial services ETF. [Stars Align for REIT ETFs]
The $288.9 million REZ has arguably benefited from an ominous sign, that being the inability of younger buyers to afford rising home prices. With heavy weights toward REITs that own apartments and storage facilities, REZ is well-positioned to benefit from an ongoing boom for rental properties.
According a a recent survey conducted by Fannie Mae, the majority of young adults living with their parents will likely rent rather than buy when they do move out. Adding to the downward trend, younger Americans have eschewed purchases and are willing to wait longer. According to the National Association of Realtors, the typical age of first-time home buyers in 2002 was 31. In a Zillow survey of over 100 economists and real estate experts, respondents expect the the age to hit 34 or older over the next decade. [A Snag for Homebuilder Recovery]
Combined with expectations that interest rates will remain low next year, those factors bode well for further upside for REZ. Top holdings in the ETF include Public Storage (NYSE: PSA), Avalonbay Communities (NYSE: AVB) and Extra Space Storage (NYSE: EXR).
Specialized REITs include a group of companies that engage in alternative real estate rentals and leasing operations. For instance, self-storage REITs could benefit from our society of hoarders, especially as baby boomers shift from large single family homes to smaller apartments, assisted living facilities and nursing homes. [Residential REIT ETFs Standout]
Speaking to the end of the last paragraph, REZ, which has a trailing 12-month dividend yield of 3.21% holds allure for long-term investors because the ETF is levered to the aging population theme. Over a third of the ETF’s 38 holdings are health care REITs, the segment of the REIT universe expected to benefit most from an aging U.S. population.
Investors intending to hold any REIT for the next two years should note that at the end of August 2016, S&P Dow Jones Indices will separate REITs from the financial services group, creating an eleventh GICS sector. [REITs Get Sector Status]
iShares Residential Real Estate Capped ETF
