A checklist comprising above-average income, attractive valuations, and positive correlations to possible interest rate cuts may sound daunting. But it is possible for investors to check all those boxes with various sector-level plays. Enter the real estate sector and the ALPS Active REIT ETF (REIT).
Real estate investment trusts (REITs) have lagged this year. But some of that disappointment is likely attributable to the Federal Reserve’s reluctance to lower interest rates. That’s a meaningful consideration when evaluating ETFs like REIT. That’s because real estate stocks are among the most rate-sensitive. Following a disappointing jobs report and downward revisions of prior months’ data, the central bank may have not choice but to pare rates next month.
That could support a REIT resurgence, but that’s not the only potential tailwind for the ALPS ETF. As noted above, valuations on income-generating real estate equities are currently depressed. That indicates REIT presents market participants with a low cost of admission for accessing big dividends.
REIT ETF Has Advantages
REIT’s status as an actively managed ETF could be particularly beneficial to prospective investors in the current climate. That’s because it implies the fund’s managers can capitalize on valuation opportunities. It also implies they can possibly allocate to real estate equities that could rally on the back of rate cuts.
Regarding the sector’s valuation case, REIT is already tethered to that story. That’s because some of its holdings look inexpensive today, including Macerich (MAC). That’s a shopping mall REIT that has shed lower-quality assets to buffer against the online shopping boom.
“Macerich’s revenue is protected by long-term leases, and while occupancy fell to 89% in 2020, it has almost fully recovered,” noted Kevin Brown of Morningstar. “We believe that Class A malls will remain dominant in brick-and-mortar retail with high-quality malls eventually returning to their prior occupancy and rent levels.”
Another example of an undervalued REIT member firm is Realty Income (O), which has a forward dividend yield of 5.71%. It also has one of the longest payout increase streaks in the sector. It’s a monthly dividend payer, and its July payout represented the 661st consecutive month in which it delivered a dividend.
Morningstar’s Brown points out that Realty Income’s “early $32 billion in acquisitions since the start of 2019” has boosted the REIT’s debt. That means it would be one of the REIT ETF’s obvious beneficiaries should interest rates come down. Invitation Homes (INVH) is another REIT holding that could be a contributor to the ETF’s bull case.
“Invitation Homes focuses on owning newer homes in the starter and move-up segments, which are typically around $350,000 in price and less than 1,800 square feet. These homes typically attract a younger demographic,” added the analyst.
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