A Smarter Way for ETF Investors to Approach Real Estate

Fixed-income investors should consider real estate assets and sector-related exchange traded funds as an alternative asset to diversify a fixed-income portfolio.

“Real estate is an important component of any diversified portfolio due to its low correlation with other asset classes and potential to provide inflation protection, dividend income, high returns and growth, and tax advantages,” Kevin Davis, Chief Growth Officer for Vident Financial, said on the recent webcast, The Secret to Investing in Real Estate ETFs.

Real estate has exhibited a strong track record as an inflation hedge and long-term store of value. Specifically, the assets can capitalize on higher rental income as inflation rises. Standard lease terms also protect landlords from cost inflation since tenants are usually responsible for operating costs such as utilities, insurance, and maintenance. In the period 1978 through 2011, real estate investment trusts provided inflation protection success rates of 65.8%, compared to gold’s 43.2% success rate.

More importantly, for fixed-income investors, real estate offer high, stable dividends that can complement or provide an alternative to bonds as a source of income. Real estate provides yields that currently exceed sovereign and corporate investment grade debt. Unlike bond coupons, real estate dividends are able to grow over time, which is especially valuable in high growth and inflation environments. Furthermore, long-term leases have provided more reliable dividends compared to other equities.

During high growth environments, real estate has shown the potential to generate competitive returns comparable to other equities and fixed income assets. Meanwhile, unlike most equities, real estate is better positioned for low growth conditions due to stable dividends.

Real Estate Among Best Performers

“Historically, real estate is among the best performing asset classes. Allowing investors to seek to benefit from real estate’s inflation protection and stable income,” Davis said.

To capitalize on the benefits of real estate investment trusts and gain smarter exposure to the real estate sector, ETF investors may consider something like the U.S. Diversified Real Estate ETF (NYSE Arca: PPTY).

Fred Stoops, Head of Real Estate Investments for Vident Financial, explained how PPTY’s portfolio is constructed based on the actual properties held by each company in the investment universe. The smart beta index-based ETF screens for four primary factors when investing in real estate, including location, property type, leverage and governance.

Location can affect the value of a property and is a key driver of real estate performance. Stable targets are used to diversify geographic exposure while favoring dynamic, high-growth locations.