Industrial Is The Way to go With REITs, Get There With This ETF

Do enough digging about real estate investment trusts (REITs) and the related ETFs and an investor is likely to come away with at least two thoughts. First, the sector is being punished because of the coronavirus impact on the economy. Second, industrial REITs are standing out for the right reasons.

The Pacer Benchmark Industrial Real Estate SCTR ETF (NYSEArca: INDS) is the premier way to play strength in industrial REITs, a corner of the REIT universe often overlooked by the traditional funds tracking this space.

INDS offers investors exposure to US companies that generate the majority of their revenue from industrial REITs that are part of the e-commerce distribution and logistics network. INDS provides exposure to the growing e-commerce space by investing in data center and distribution center REITs, along with higher quality retail real estate.

“Industrial REITs have a higher portion of short-term leases relative to retail and office REITs, so there is a slightly bigger short-term impact as a higher percentage of leases come up for renewal each year,” said Morningstar in a recent note.

Retail Help, Not Woes

While some analysts are speculating that industrial REITs could be confounded by weakening consumer confidence on par with retail ETFs, other data points suggest INDS is positioned to endure retail weakness. In fact, thanks to the e-commerce boom, the ETF is poised to thrive as shoppers move online.

The COVID-19 pandemic is forcing a slew of malls and retail store closures across the world. In the U.S., many non-essential retailers are temporarily closed and while traditional grocery stores remain open, many shoppers are opting to order from home and not risk contracting the coronavirus by venturing outside.

“However, we think the likelihood that individuals switch channels from physical retail to online purchases provides a significant offset,” said Morningstar. “The severity of a downturn is likely to dictate in which direction this washes out. In a severe or lengthy downturn, the negative impact from lower consumer spending is likely to outweigh channel switching.”

Importantly, INDS is outperforming traditional REIT indexes and ETFs, many of which aren’t adequately allocated to industrial REITs, in the current rough market.

“Disruptions in supply chains remain a potential negative factor, but it is difficult to gauge how severe this impact is and will be highly situational,” according to Morningstar. “We don’t think this is an issue for the industrial REITs because global supply chains will likely to be able to adjust over time.”

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.