Amid hopes that the Federal Reserve will eventually lay off interest rate increases this year, some rate-sensitive sectors are soaring to start 2023. That includes real estate.
In fact, some real estate exchange traded funds are sporting double-digit gains barely more than a month into 2023. Proving that a fund doesn’t need to be heavily concentrated in a small number of stocks, the Invesco S&P 500 Equal Weight Real Estate ETF (EWRE) is higher by 11.45% year-to-date.
As an equal-weight ETF, EWRE may be seen as an avenue for tapping into the value factor as so many equal-weight ETFs do, but the reality is that just over 13% of the ETF’s 32 holdings are classified as value stocks. That said, EWRE may be offering more value than readily meets the eye, particularly in the wake of the real estate sector’s 2022 woes.
“That’s left plenty of undervalued REIT stocks, such as apartment complex owner AvalonBay Communities AVB, and others that are worth considering for long-term investors. Of the 107 real estate stocks in the index, 37 are covered by Morningstar equity analysts. Of those, 27 were undervalued as of Jan. 27, 2023,” wrote Morningstar analyst Margaret Guidici.
Apartment real estate investment trust (REIT) AvalonBay is one of EWRE’s holdings, accounting for 3.31% of the fund’s roster, but there’s more to the equal-weight ETF’s value story. Across a variety of real estate sub-groups, including apartments, hotels, retail, and more, there’s value to be had. Fortunately for investors considering EWRE, that sentiment applies to some of the fund’s components.
That group includes Equity Residential (NYSE:EQR) and Essex Property Trust (NYSE:ESS), which combine for about 6.60% of EWRE’s portfolio. Equity Residential has exposure to compelling markets such as Los Angeles, San Diego, San Francisco, Washington D.C., New York, Boston, and Seattle.
“These markets exhibit traits that create demand for apartments, like job growth, income growth, decreasing homeownership rates, high relative cost of single-family housing, and attractive urban centers that draw younger people. The company regularly recycles capital by selling noncore assets or exiting markets and using the proceeds for its development pipeline or acquisitions with strong growth prospects, a strategy that has produced strong returns,” added Guidici.
VICI Properties (NYSE: VICI), the largest casino landlord and an EWRE holding at a weight of 3.10%, is another REIT that could propel the ETF in 2023.
“Present levels of 15.9x 2023E earnings before interest, taxes, depreciation and amortization (EBITDA) and 4.77% yield are attractive, given the further built-in growth from rent escalators based on tenant operations and pending acquisitions not yet fully reflected in estimates,” wrote Jefferies analyst Jonathan Peterson in a January note.
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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.