Real estate investment trusts and sector-related exchange traded funds have been among the most popular investments in an extended low-rate environment. However, after this year’s run, REITs may be starting to look pricey.
The Vanguard REIT ETF (NYSEArca: VNQ) is the eighth most popular ETF of 2016, adding $4.6 billion in net inflows year-to-date, according to ETF.com.
The REITs sector has outperformed the broader markets. Year-to-date, VNQ rose 13.9% while the S&P 500 Index gained 8.3%. Additionally, the asset category offers some attractive yields, with VNQ showing a 3.27% 12-month yield.
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However, Goldman Sachs Group Inc. warned that the area is growing too risky for investors after the outperformance.
“Real Estate has outpaced the S&P 500 by 156 basis points year-to-date, which has hurt large-cap mutual fund returns given their underweight allocation to the sector,” Goldman Sachs analysts led by David Kostin One said in a note, according to Bloomberg.
[related_stories]Observers, though, have pointed out that the REITs sector could gain momentum ahead as Real Estate will separate from Financials to become its own S&P 500 sector, which could help the new REITs sector attract greater inflows from underweight money managers.
The S&P Dow Jones Indices stated it would add an 11th sector to its Global Industry Classification Standard, creating a new Real Estate Sector from the Financial Sector. The changes to the S&P 500 index will be implemented after the close of business on September 16, 2016.
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According to Goldman, close to half of large-cap core fund managers have no exposure to REITs. The analysts also project as much as $19 billion in new money could flow to the REITs space as funds that are not in real estate try to play catch up.
However, Goldman argued that it is not enough to put a buy rating on the REITs sector.
“Looking forward, we recommend a Neutral weighting to the Real Estate sector given slowing top-line revenue growth, average relative valuation, and risks from a higher interest rate environment,” Goldman said.
For more information on real estate investment trusts, visit our REITs category.