By the end of April, the S&P 500 was off 13.26% year-to-date, and the fourth month of the year was one of the worst months in years for growth and technology stocks.
Those are indications that plenty of investors are open to “less bad” ideas or asset classes with defensive traits. Though not perfect, real estate investment trusts (REITs) check those boxes, suggesting that exchange traded funds such as the ALPS Active REIT ETF (NASDAQ: REIT) are relevant in the current environment.
REIT is outperforming the S&P 500 by almost 600 basis point in 2022, and the ALPS fund is beating the largest ETF in the real estate category by roughly 300 basis points. That could be a sign that REIT is poised to, at the very least, continue performing less poorly than rivals and the broader market.
“One reason for the relative outperformance: REITs are seen as a hedge against inflation, a crucial consideration, given that the consumer price index in March increased by 8.5% year over year on a headline basis. REITs, which are required to pay out at least 90% of their taxable income to shareholders, are popular among income investors,” reports Lawrence Strauss for Barron’s.
A primary benefit of REIT in the current climate is that the ALPS fund is actively managed. As noted above, broader, passive REIT funds are struggling this year, but active management may be one reason that REIT is topping some passive rivals. At the very least, active management could help investors avoid significant exposure to some of the laggard groups in the real estate sector.
“Most REIT sectors are in negative territory this year. Industrial REITs, many of which outperformed earlier in the pandemic, are down about 4.5%; the office sector, which has been hampered by the prevalence of employees working from home since the pandemic started, is off about 3%; and data centers have lost about 12%,” according to Barron’s.
REIT’s status as an actively managed fund is also important because it can more nimbly allocate to REITs with pricing power while steering clear of those with weak balance sheets that could be highly vulnerable to rising interest rates. By being able to swiftly embrace REITs with strong funds from operations (FFO) profiles, REIT can deliver the goods for income investors.
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.