This year, the real estate sector is one of the top-performing groups in the S&P 500, and some research firms believe that bullishness will carry into 2022.

That would be constructive for an array of exchange traded funds, including the ALPS Active REIT ETF (NASDAQ: REIT). The actively managed REIT debuted in late February and has done well despite missing out on almost the first two months of the year. The ALPS fund is higher by 24.46% since its launch.

REIT could build on that impressive start in 2022 as some analysts point to more upside for real estate equities in the new year. BMO Capital Markets recently upgraded the sector to “market weight” from “underweight.”

“Blended (funds from operations) growth for Real Estate has been consistently improving in recent months, climbing into double-digit territory for the first time in four years,” chief investment strategist Brian Belski said in a note to clients. “On a relative basis, FFO growth looks to have troughed, while NTM growth forecasts continue to accelerate vs. the market rate.”

Figuring Out Financial Health

FFO is a critical tool in valuing real estate investment trusts (REITs) and one that paints a picture of a REIT’s financial health. On a related note, REIT’s active management style is advantageous on this front because the managers can embrace strong FFO names as they see fit. Index strategies aren’t that nimble.

“Revisions have also been pretty strong as the breadth of upward FY1 & FY2 FFO revisions have held above 70% for seven straight months, setting up a solid backdrop for growth heading into 2022,” Belski adds. “Dividend growth, which represents a key attribute for Real Estate, has shown clear signs of improvement recently, but at the same time, still has a way to go to reach its pre-pandemic level.”

Although real estate is viewed as a rate-sensitive sector, and the Federal Reserve will likely raise interest rates next year, REIT shouldn’t be ignored because economic growth could support more upside for real estate equities in the new year.

“In addition, historical price action in the sector has typically been more sensitive to the economy than other yield proxies, which should help performance next year with US economic growth expected to remain above-trend,” adds BMO Capital Markets.

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.