A+ Real Estate ETFs to Capitalize on a Dovish Fed

The broader IYR tracks the Dow Jones U.S. Real Estate Index, which holds all domestic REITs, including mortgage REITs and non-real-estate specialty REITs. Sub-sector weights include specialized REITs 26.8%, retail REITs 20.0%, residential REITs 13.4%, office REITs 10.1%, health care REITs 9.7%, diversified REITs 5.1%, mortgage REITs 4.7%, hotel & resort REITs 3.9%, industrial REITs and real estate services 2.1%. IYR has a 0.43% expense ratio and a 4.17% 12-month yield.

Alternatively, investors may also consider targeted REIT ETF options. For instance, the iShares Mortgage Real Estate Capped ETF (NYSEArca: REM) and VanEck Vectors Mortgage REIT Income ETF (NYSEArca: MORT) focus on mortgage REITs or mREITs. REM has a 0.48% expense ratio and a 11.39% 12-month yield. MORT shows a 0.41% expense ratio and a 9.61% 12-month yield.

While REM and MORT offer attractive high yields, mortgage REITs are more susceptible to rising interest rate risks and a flattening yield curve. Mortgage REITs generate revenue by using leverage to capitalize on the spread between short- and long-term interest rates. Consequently, if short-term rates rise or long-term rates decline, the diminished spread would hurt mREITs.

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Additionally, investors may also be interested in international REIT ETF exposure as foreign central banks engage in zero or negative interest rate policies. With global central banks depressing rates, foreign investors may turn to riskier assets, like REITs, in search of better income sources. Consequently, the greater demand could support gains in international REIT ETFs, such as the SPDR Dow Jones International Real Estate ETF (NYSEArca: RWX) and Vanguard Global ex-U.S. Real Estate ETF (NYSEArca: VNQI).

RWX, which tracks the Dow Jones Global ex-U.S. Select Real Estate Securities Index, includes large a hefty 23.4% tilt toward Japan and 31.6% to Europe, areas where central banks have enacted negative interest rate policies. Additionally, the fund includes 15.4% to Australia, which recently saw interest rates cut to a new low. The ETF has a 0.59% expense ratio and a 2.70% 12-month yield.

VNQI, which follows the S&P Global ex-U.S. Property Index, also includes 24.3% Japan, 26.1% developed Europe and 11.3% Australia exposure. The fund has a 0.18% expense ratio and a 2.78% 12-month yield.

For more information on the Real Estate ETF market, visit our Real Estate category.