3 REIT ETFs Holding Up Despite Market Storm [Vanguard REIT ETF]

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October 23, 2014 4:49pm NYSE:ICF NYSE:REZ

reitThe U.S. stock markets have seen quite a rocky start to the final quarter of the year with all the three major equity market indices – S&P 500, the tech laden Nasdaq and the blue chip Dow Jones Industrial Average – trading in the red


from the quarter-to-date look.

The surge in volatility and the related fear were evident in the sharp spike in the Wall Street fear gauge indicator – the CBOE Volatility Index – which recently hit the highest level since November 2011.

However, the current frenzy and the nervousness in Wall Street notwithstanding, the REIT corner of the equity markets has clearly managed to withstand the storm and has been a clear winner to start the quarter. In fact, most of the popular REIT ETFs have managed to return in excess of 3% for the past month in comparison to the 4.5% negative return by the ultra-popular SPDR S&P 500 ETF (SPY).

What’s Driving REITs higher?

The highly interest rate sensitive sector of the economy was the natural beneficiary of falling Treasury yields in the face of global economic growth concerns. The International Monetary Fund (IMF) has recently downgraded its outlook for global growth due to weak Euro zone conditions and a slowdown in several emerging market nations as well.

Concerns of a triple dip recession in Europe, sluggish growth in Japan, falling growth in China with the country’s third quarter GDP near a 6-year low and tumbling energy prices have led investors to shun risky assets in search of safe-haven options.

In fact, given the global growth concerns, the Fed has again reassured investors to keep interest rates low for a considerable time. Also, speculations are rife that the Fed might have to further delay its timing of rate hikes, possibly to 2016 from the earlier forecasts of a hike in mid-2015, as global growth stutters.

These have led to increased activity in the U.S. treasury market in a way not seen since the bottom of the financial crisis. Specifically, the 10-year Treasury yield has fallen to 2.20% from 2.60% in mid-September.

As Treasury yields fall, REITs have gained immense popularity in the past few weeks as investors continue to search for yield in the current environment of ultra low rates (read: 3 Overlooked Bond ETFs Holding Up in The Market Slump).

Below we have highlighted three REIT ETFs that have managed to hold up despite the market storm and have produced positive returns in the past one month. Investors should keep an eye on these products which might see further gains if the Treasury yields continue to stay at low levels.

iShares Residential Real Estate Capped ETF (NYSEARCA:REZ)

This ETF has added close to 5.9% in the past one month, while it has a 30-Day SEC yield of about 3.78%, making it a decent income choice as well. REZ manages an asset base of $238.7 million and trades with moderate volumes.

The fund tracks the FTSE NAREIT All Residential Capped Index to provide exposure to U.S. residential, health care and self-storage real estate equities. The fund holds a small basket of 36 stocks with Public Storage, Equity Residential, and Health Care REIT being the top three holdings.

Among sector holdings, specialty REITs (50.7%) dominate the fund, followed by residential REITs (46.8%)

iShares Cohen & Steers REIT ETF (NYSEARCA:ICF)

ICF tracks the Cohen & Steers Realty Majors Index to provide exposure to a small basket of 31 U.S. REITs. Simon Property, Public Storage and Equity Residential occupy the top three spots with a combined allocation of roughly 20%.

ICF is one of the popular funds in the space with an asset base of $2.9 billion and has good trading volume. The fund has returned 4.7% in the past four weeks and has a 30-Day SEC yield of 3.21%.

Vanguard REIT ETF (NYSEARCA:VNQ)

VNQ is the most popular ETF in the space with an asset base of $24 billion and an average trading volume of 3.2 million shares. VNQ tracks the MSCI US REIT Index that covers about two-thirds of the value of the entire U.S. REIT market.

The fund has the highest allocation to retail REITs (25.9%), followed by residential REITs (16.3%) and health care and office REITs with 13.3% allocation. Simon Property, Public Storage and Equity Residential occupy the top three spots in terms of exposure.

The fund is one of the low cost choices in the space, charging only 10 bps in annual fees from investors.  The fund has gained 3.8% in the past one month and has a solid 3.78% in annual dividends.

This article is brought to you courtesy of Zacks.


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