Real estate investment trust exchange traded funds have been outperforming the broader market on an improving economy and unexpectedly low interest rates, and the asset class may have more room to run.
Charles Sizemore, chief investment officer of Sizemore Capital Management, argues that while U.S. equities are trading at elevated valuations, REIT dividend yields have not reflected the long rally – REIT yields have an inverse relationship to their stock price and have remained relatively flat over the past nine years.
Specifically, Sizemore points to the REIT dividend yields of the FTSE NAREIT All Equity REIT Index, which shows yields have remained range bound between 3.2% to 4.0% since 2006.
The iShares Real Estate 50 ETF (NYSEArca: FTY), which tracks the FTSE NAREIT Real Estate 50 Index, has a 3.39% 12-month yield and the iShares North America Real Estate ETF (NYSEArca: IFNA), which follows the broader FTSE EPRA/NAREIT North America Index, has a 3.08% 12-month yield.
In contrast, the FTSE NAREIT All Equity REIT Index showed about an 8% yield through the 1970s, ’80s and start of the ’90s. However, to put the yields in perspective, CPI inflation wa at 13.9% and benchmark 10-year Treasury yields were above 12% in 1980, which made the 8% REITs yield look bad in comparison.