Fine-Tune Your Real Estate Exposure with 'REIT'

The real sector is the best-performing group in the S&P 500 this year and the ALPS Active REIT ETF (NASDAQ: REIT) is proving just how beneficial it can be to be selective, soaring about 19.3% in just four months since inception.

While the real estate sector is well back from its coronavirus trough of 2020, some market observers point to a sector with both compelling opportunities and spots of weakness.

“The outlook for office REITs is highly uncertain and will likely stay so until we know if there will be an enduring shift toward remote working—though the recent trend appears to be for most workers to eventually return to the office,” writes Schwab’s David Kastner. “While net debt for the sector is low by historical standards, the risk to cash flow puts many REITs in a difficult position.”

Avoiding trouble spots in any sector is easier said than done for index-based exchange traded funds. However, that objective highlights the advantage of active management. The ALPS fund doesn’t need to maintain large exposure to office REITs and it can deploy capital in more attractive corners of the sector and those opportunities do exits.

“Warehouse/distribution center demand appears to be outstripping supply—resulting in sharply rising rents,” notes Kastner. “And with the rapid rise in home prices amid low rates and de-urbanization, REITs specializing in single-family home rentals and manufactured homes stand to benefit—and this will likely translate into higher multi-family rents, as well.”

Beyond industry-level opportunities, the macroeconomic environment is currently conducive to considering a fund like REIT. The real estate sector usually performs well when interest rates are low. Historically, it’s one of the better-performing sectors in inflationary climates, and if the economic recovery continues on pace, tenants will be able to continue meeting rental obligations.

“If the economy expansion continues at a brisk pace, people get back to work, and interest rates stay low as the Federal Reserve maintains accommodative monetary policy, the Real Estate sector could do very well,” adds Kastner. “In a generally still low interest rate environment combined with renewed demand for office and retail space, investors’ search for yield and attractive valuations could be a strong tailwind for the sector.”

Other REIT ETFs include the Schwab US REIT ETF (NYSEArca: SCHH) and the Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF (SRVR).

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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.