ETF investors who are interested in the real estate sector can consider a differentiated approach to Real Estate Investment Trust (REIT) selection, identifying the benefits of short-term REITs to help enhance their portfolios and better manage potential risks.
On the recent webcast, A Differentiated Approach to REIT Selection, Jordan Farris, Managing Director, Head of ETF Product Development, Nuveen, explained that REITs are companies that own or manage income-generating real estate assets. Without having to own the physical property, individual investors can also invest in publicly-traded REITS and earn the attractive dividend from these securities. Farris also highlighted the long-term benefits of short-term REITs, which can adjust pricing more frequently than longer-term REITs, may adapt more quickly to changing market conditions and can be less sensitive to movements in interest rates.
“As investors contemplate the implications of political and economic uncertainty on capital markets, it seems a pertinent time to readdress the rationale for real estate in multi-asset portfolios,” Farris said. “For investors reappraising risk and reward, real estate may fulfill a need for diversification, performance, and importantly yield in a world starved of income.”
Silvia Kitchener, Director, Global Equity Indices, S&P Dow Jones Indices, highlighted the Dow Jones U.S. Select REIT indexing methodology as a benchmark for investors to gauge the real estate market. She explained that the constituents of the Dow Jones U.S. Select REIT Index are classified into short-, medium-, and long-term buckets based on the typical average lease duration of the different REIT sectors.
Specifically, the short-term bucket includes REITs like apartments, hotels, manufactured homes and self-storage. The mid-term bucket covers industrial, mixed, industrial/office, strip centers, factory outlets and diversified REITs. Lastly, the long-term bucket holds health care, regional malls and office REITs.
Kitchener pointed out that these various REIT lease durations also exhibit varying degrees of interest rate sensitivity. For example, when comparing sub-sectors versus the broader Dow Jones U.S. Select REIT Index during periods of rising interest rates reveals, the frequency of outperformance was highest among short-term sectors like hotels 100% of the time, apartments 67% and self-storage 67%.
“Dow Jones U.S. Select Short-Term REIT Index outperformed the broader REIT market during short-term spikes in the 10-Year Treasury yield with greater consistency during higher magnitude rate increases,” Kitchener said. “The index neither outperformed nor underperformed in periods of falling rates.”
Looking ahead, investors may also consider short-term REITs to capitalize on the growth in apartment demand with expanding urban populations.
“Investments may benefit from alignment with evolving global trends as the world’s population ages, migrates to cities, and embraces technological advancements,” Farris added. “Low correlation of real estate returns with those for equities and fixed income products is one of the main arguments for including real estate in a mixed-asset portfolio.”
As a way to help investors capture the short-end average lease duration in the REITs space, investors can look to the NuShares Short-Term REIT ETF (BATS: NURE), which tries to reflect the performance of the Dow Jones U.S. Select Short-Term REIT Index. Current holdings include apartment REITs 48.5%, hotel REITs 24.1%, self storage REITs 17.3% and manufactured home REITs 10.1%.
Financial advisors who are interested in learning more about real estate investment trust strategies can watch the webcast here on demand.