Sectors and exchange traded funds focusing on the domestic economy could benefit investors amid international headline risk. Even better if those funds offer solid income streams and above-average dividend yields. Enter the real estate sector and real estate investment trust (REIT) ETFs.
Real estate has historically exhibited low correlation to stocks, bonds and commodities, which makes the asset a great source of diversification. The FTSE NEREIT All Equity REITs Index has exhibited a 0.552 correlation to the S&P 500, a 0.115 correlation to commodities, a 0.475 correlation to the MSCI EAFE Index, a 0.352 correlation to the emerging markets, 0.198 correlation to the Barclays U.S. AGG Index and 0.052 correlation to U.S. Treasuries.
Well-known real estate ETFs include the Vanguard REIT ETF (NYSEArca: VNQ), iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR), Schwab US REIT ETF (NYSEArca: SCHH), and the Real Estate Select Sector SPDR Fund (NYSEArca: XLRE).
Real estate investors also enjoy attractive dividend yield-generation, which provides an alternative to bonds as a source of income. The sector offers yields that exceed sovereign and corporate investment bonds. Unlike bond coupons, real estate dividends can grow over time, which is invaluable in periods of high growth and inflationary environments. Additionally, due to real estate’s long-term leases, they provide a more reliable source of dividends than other equities.
“REITs, which typically own income-producing real estate, are required to pay out at least 90% of their taxable income to shareholders. That makes them attractive to income investors,” reports Lawrence Strauss for Barron’s.
Favorable Climate for REIT ETFs
Some REITs have experienced stable demand and healthy debt levels in a stable and growing economic environment with rising job growth. Importantly, REITs have low correlations to international stocks, including Chinese equities.
“During April and the first two weeks of May, the correlation between REITs and the China CSI 300 Index was essentially zero, down from a still low 9% from 2013 through 2016,” according to Barron’s.
REIT returns in high growth periods have shown the potential to be competitive with equities and fixed-income investments. Meanwhile, real estate is better positioned for low growth environments when compared to most equities due to the stable dividend potential.
For more information on the real estate investment trusts segment, visit our REITs category.
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.