Investors may want to keep an eye on real estate investment trusts and sector-related exchange traded funds this year as fundamental factors are still supportive of the asset class.
REITs were among the best performers Tuesday, with the IndexIQ US Real Estate Small Cap ETF (NYSEArca: ROOF) up 2.1% and iShares Residential Real Estate Capped ETF (NYSEArca: REZ) 2.3% higher.
ROOF tracks a group of small-cap real estate firms, including a 30.7% tilt toward micro-caps, 66.7% small-caps and 2.6% mid-caps. REZ includes a group of residential REITs 47.8%, health care REITs 31.6% and specialized REITs 20.3%.
Broad REIT ETFs were also outperforming the equities markets Tuesday. For instance, the iShares Cohen & Steers Realty Majors (NYSEArca: ICF), Vanguard REIT ETF (NYSEArca: VNQ), Schwab US REIT ETF (NYSEArca: SCHH) and SPDR Dow Jones REIT ETF (NYSEArca: RWR) were all about 2.0% higher mid-Tuesday.
Matt Werner, a portfolio manager at Chilton Capital Management, argues that REIT fundamentals were better than projected, with long-term Treasury yields “well below” Chilton’s expectations, reports Sarah Borchersen-Keto for REIT.com.
Expectations for higher interest rates usually drag on REITs as the dividend-yielding equity asset look less attractive relative to safer government bonds in a rising rate environment.
While the Federal Reserve is moving toward interest rate normalization, the Fed has reassured markets that it will make gradual hikes.
“The overall economic backdrop still paints a picture of low rates enduring for quite some time,” Alexander Goldfarb, a managing director at Sandler O’Neill & Partners, told REIT.com. “The steadily growing U.S. economy, coupled with limited new supply, means that REITs should outperform in 2016.”
Moreover, Werner and Goldfarb point argue that REITs could see continued strength in 2016 as the real estate asset category is elevated to the 11th headline sector in the Global Industry Classification Standard, or GICS. As REITs gain a sector classification, investors may no longer relegate real estate as an alternative investment and funnel more money into the area as part of a diversified equity portfolio.
Werner also believes that reforms to the Foreign Investment in Real Property Tax Act (FIRPTA) could also bolster capital flows into the sector.
“These reforms should provide for easier flow of capital from foreign investors into publicly traded REITs and high-quality commercial real estate,” Werner said.
Vanguard REIT ETF
Max Chen contributed to this article.