Count real estate among the sectors that slumped last year that are rebounding nicely to start 2023. Just look at the Dow Jones U.S. Real Estate Capped Index, which is higher by 6.26% year-to-date. Amid expectations that the Federal Reserve will deploy three interest rate increases of 25 basis points apiece in the first quarter and then perhaps halt its tightening cycle, rate-sensitive real estate investment trusts (REITs) and the related exchange traded funds could be back in style. Investors looking to tap a REIT rebound may want to evaluate active management, which is available with ETFs such as the ALPS Active REIT ETF (REIT).
Active management could prove fruitful with real estate equities because contrary to what many novice investors may believe, this is an evolving, fluid asset class and some of those changes are meaningful regarding long-term returns.
“These structural changes to the real estate market, in addition to REITs historically rewarding investors well over the long run, have helped investors feel more confident in this asset class. Since the beginning of the modern-REIT era in 1991, REITs’ annualized returns have outperformed the U.S. stock market more than 56% of the time,” wrote Morningstar analyst Jeremy Pagan.
For its part, REIT, which turns two years old next month, can leverage active management to expand beyond the confines of index-based real estate ETFs. The ALPS fund’s managers can scour a dozen industry groups to find opportunities. That selection universe includes core real estate groups such as industrial, offices, apartments, and retail as well as diversified REITs, hotels, specialty, and single-family, among others. The ALPS fund is overweight industrial and residential REITs relative to its benchmark. It’s underweight net lease and office REITs.
Translation: While REIT doesn’t have the largest lineup in the real estate ETF category, active management can pave the way for the fund to be diverse relative to its peer group. Not only that, but over the long haul, portfolios can benefit even from modest real estate allocations.
“Additionally, recent research found that low-risk-aversion investors (with their higher benchmark allocation in stocks) who are fully invested in a stock and bond portfolio and are considering real estate assets would obtain higher returns by including REIT common stocks, while high-risk-aversion investors would benefit in more risk reduction from REIT preferred stocks,” concluded Pagan.
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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.
