After U.S. home sales rose to their highest level since 2006 last year, the Wall Street Journal is reporting that mortgage rates are rising at their fastest pace in 35 years. According to Freddie Mac, the average rate on a 30-year fixed-rate mortgage climbed to 5% as of Thursday from 3.22% in early January.
Despite record-high home prices and rapidly rising mortgage rates, demand for real estate appears to be staying strong, and not just within the residential market. Per S&P Dow Jones Indices, the Dow Jones U.S. Select Short-Term REIT posted a 32.2% gain over the trailing 12-month period. Among U.S. REIT sectors, hotels (6.6%), healthcare (5.3%) and office (1.9%) were the best performers for Q1.
So, investors looking to gain exposure to real estate may want to consider the Avantis Real Estate ETF (AVRE). Launched last September, AVRE gives exposure to real estate securities that are focused on income derived from investments within real estate and are structured similarly to real estate investment trusts (REITs).
The actively managed AVRE attempts to beat the S&P Global REIT Index and seeks to invest in companies that have higher returns or better risk characteristics. A REIT invests primarily in income-producing real estate or else makes loans to individuals involved in the real estate industry.
REITs and REIT-like entities typically distribute a large portion of their earnings to qualify as tax passthrough entities, thus keeping high levels of leverage available to finance their growth or operations. AVRE can underweight or exclude securities with high leverage to achieve a better risk-return profile at times when borrowing, refinancing, or raising capital may be more expensive for those securities.
The portfolio managers consider a company to be engaged in the real estate industry if at least 50% of its revenue or 50% of its market value at the time of purchase is attributed to the ownership, construction, management, or sale of real estate.
AVRE carries an expense ratio of 0.17%.
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