Real estate is one of the smallest sector weights in the S&P 500. That status belies the fact that the sector is home to an array of subgroups. In fact, some traditional, passive ETFs addressing real estate stocks can address five, seven, or more segments.
In varying forms, commercial real estate (CRE) is part of that mix, often for significant size. That’s also one of the corners of the real estate sector that’s been under duress as office occupancy rates plunged in the wake of the COVID pandemic. However, some experts believe CREW will see a renaissance. And that could benefit ETFs such as the ALPS Active REIT ETF (REIT).
Regarding betting on a CRE resurgence, REIT offers investors some advantages. First, as its name implies, the ALPS ETF is an actively managed fund. That means the managers can be responsive to opportunities and trouble spots in the CRE realm than passive competitors can. Second, REIT diversifies its lineup so it’s not solely on just one or two real estate subgroups.
CRE Could Be REIT Catalyst
CRE has been one of the more embattled corners of the broader real estate sector. Yet it could also act as a spark for REIT and related funds. That’s particularly so if the Fed embarks upon a credible campaign of monetary easing.
“We believe real estate’s attractive income potential, low correlation with other asset classes, and inflation hedging properties look compelling amid macroeconomic uncertainty and an environment of structurally higher interest rates and inflation,” noted Goldman Sachs Asset Management (GSAM).
Underscoring the case for REIT as a play on a CRE rebound is the point that this investment thesis may be ideally suited for active management. As GSAM pointed out, signs of a CRE turnaround are appearing. However, investors need to be selective.
Beyond a potential CRE rebound, REIT offers investors other advantages. These include dependable income, inflation-fighting attributes, and reduced correlations to traditional stocks. The correlation point is particularly relevant at a time when many investors may have portfolios that are excessively allocated to mega-cap growth stocks.
“Furthermore, real estate can enhance a portfolio’s risk-adjusted return by offering diverse, less correlated return streams. The unique supply and demand characteristics of real estate, along with lease structures, introduce market-, sector-, and asset-specific factors that can mitigate sensitivity to broader economic trends,” concluded GSAM.
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