The real estate sector represents a mere 2.31% of the S&P 500. Just two sectors – materials and utilities – command smaller allocations in the benchmark domestic equity gauge. That low weight garnered by real estate stocks and REITs belies the popularity of those assets among investors.
A recent survey by Nareit indicated that approximately 168 million Americans, or half the households in this country, have some exposure to REITs. That exposure is attained through individual stocks, index funds and open-end mutual funds.
That level of enthusiasm could also be a positive for exchange traded funds such as the ALPS Active REIT ETF (REIT). The actively managed REIT turns three years old later this week. Additionally, it could be prime beneficiary of market participants continuing to allocate to real estate stocks.
Diversity of REIT Ownership Could Bode Well for REIT
The variety of accounts through which investors own real estate stocks potentially enhances the outlook for increased adoption of REIT. That could signal REIT and rival funds are suitable for a broad swath of investors.
Citing data from the Federal Reserve, Nareit noted “household equity exposure in one or more of these non-mutually exclusive channels: tax deferred retirement accounts (54.3% of households), direct stock (21.0%), direct holdings of pooled investment funds (11.5%), and other managed assets (6.2%).”
The data also indicated that the primary avenue through which many investors access REITs in retirement accounts is via broad market funds or target-date funds. That implied there’s ample room for market participants to deploy real estate stocks and funds such as REIT in non-tax-deferred accounts while leveraging those products to bolster broad portfolio income.
“Multiplying the share of fund ownership by the share of funds with REITs by the number of households with equities and summing across fund types yields the total number of households with REITs,” added Nareit. “66.1 million households (approximately 50% of households) have REITs. Finally, multiplying the number of households by the average number of people per household from Census data (2.54), yields approximately 168 million Americans in[1]households with REIT ownership.”
REIT could be at the right place at the right time for multiple reasons. First, as the ETF’s name implies, it’s actively managed, meaning it can avoid some of the beaten up REIT segments. Second, the real estate sector is viewed as attractively valued. Finally, REIT and related ETFs could benefit if the Federal Reserve opts to lower interest rates this year.
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