Real estate represents less than 3% of assets in the SPDR S&P 500 ETF (SPY), yet it has long been a far more popular sector in advisor-led portfolios. At VettaFi, we saw a spike in interest for real estate sector ETFs during the second quarter in 2022 relative to the first quarter. As a percentage of monthly advisor traffic to sector ETF tickers, real estate ETFs represented 9.8% in the second quarter, up from 7.2% in the first quarter (a 36% increase).
While interest in real estate remains less than that of energy, the most popular sector in 2022, we find the data compelling given the relatively weak performance. The three largest real estate sector ETFs were down close to 20% year-to-date through July 12 with a similar loss as the broadly diversified SPY, but far worse than dividend-yielding, defensive sector ETFs like the Consumer Staples Select Sector SPDR (XLP) and the Utilities Select Sector SPDR (XLU).
Despite a healthy dividend yield, the real estate sector is considered to be cyclical given its connection to the retail, industrial, and residential markets. However, the largest industry group for most real estate ETFs is specialized REITs, which consists of companies like American Tower (AMT) and Crown Castle (CCI).
The Vanguard Real Estate ETF (VNQ) is the sector ETF heavyweight with $38 billion in assets. However, it has suffered approximately $900 million of net outflows this year. In contrast, the Real Estate Select Sector SPDR ETF (XLRE) gathered $400 million of new money in 2022 to push its asset base to $5.3 billion. The Schwab US REIT ETF (SCHH), which is the second-largest sector ETF with $5.9 billion in assets, had a slight $7 million of net inflows.
However, there are smaller real estate ETFs that have performed better in 2022, and three of them are focused on higher-dividend-yielding companies.
The Global X SuperDividend REIT ETF (SRET) was down 13% for the year by owning 30 of the highest-yielding REITs in the world. The $330 million ETF held primarily U.S.- (56% of assets) and Singapore-based (30%) companies, with smaller stakes in Canada (7%) and Australia (6%). Dynex Capital (DX), Getty Realty (GTY), and WP Carey (WPC) are examples of the fund’s top holdings. SRET, with a 6.3% dividend yield, is a real estate sector-specific version of the Global X SuperDividend ETF (SDIV).
The Invesco KBW Premium Yield Equity REIT ETF (KBWY) is down 9.7% thus far in 2022. KBWY focuses on small- and mid-cap U.S. companies that have competitive yields. Top holdings for the $285 million ETF include Global Net Lease (GNL), Necessity Retail REIT (RTL), and Office Properties Income Trust (OPI). KBWY, with its 5.5% yield, is a cousin of the Invesco KBW High Dividend Yield Financial ETF (KBWD).
The ALPS REIT Dividend Dogs ETF (RDOG) was down 17% this year. The $25 million RDOG holds the five highest-yielding REITs in nine subindustries with nearly equal exposure to office REITs, residential REITs, retail REITs, office REITs, and specialized REITs. Duke Realty (DUK), National Retail Properties (NNN), and Realty Income (O) are some of the fund’s top holdings. RDOG, with its 4.0% yield, is the complement to the ALPS Sector Dividend Dogs (SDOG), which provides exposure to 10 sectors but owns no real estate holdings.
While many advisors rely on VNQ to provide equity income with its above-average dividend yield of 3.0%, the above smaller ETFs sport even higher yields.
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