After a bull run in the first four months of the year, the U.S Real Estate Investment Trust (REIT) industry had nosedived after the onset of “taper talk” which pushed up interest rates sharply. Since then, the downside risk in the sector has been acute with S&P/TSX Capped Real Estate Index trimming about 5.10% in the last six months.
However, the trend recently saw a reversal after the Federal Reserve’s surprising ‘No Taper’ decision that ended four months of market speculation (Read: REIT ETFs Rise as Treasury Yields Finally Tumble).
Prior to the recent uptrend in interest rates, these high-dividend paying stocks were in great demand due to ultra-low interest rates. After the no-taper shocker, this interest rate sensitive REIT sector sending it northward. Since then, the sector has been outperforming the broader market.
The yield on the benchmark U.S. Treasury 10-year note has declined to 2.63% as of October 4, 2013 from 2.76% as on September 19, 2013.
Investors are once again turning their focus towards this corner of the investing world in view of the fact that yield on 10-year Treasury note is still lower than the average rate of 6.4% during 1912 to 2013, even after the spike in interest rates in recent times should soothe investors’ nerves.
Dividends still remain an attraction in the sector. With the U.S. law requiring REITs to distribute 90% of their annual taxable income in the form of dividends to shareholders, yield-seeking investors continue to prefer these stocks. A decline in borrowing costs normally supports REITs dividend profile since the policy is in favor of servicing debt and accessing capital. This favorable business environment helps REITs boost their dividends. Recovering housing and labor markets will also act as major tailwinds.
In such a scenario, investors might want to pay close attention to the REIT ETF market in the near term. Below, we briefly highlight the some funds in the space which could be great short-term picks. Vanguard REIT ETF (NYSEARCA:VNQ), iShares U.S. Real Estate ETF (NYSEARCA:IYR), SPDR Dow Jones REIT ETF (NYSEARCA:RWR), Schwab U.S. REIT ETF (NYSEARCA:SCHH), and First Trust S&P REIT Index Fund (NYSEARCA:FRI) gained a respective 2.24%, 2.44%, 2.28%, 2.0% and 2.1% in the last month (as of September 25) while SPDR S&P 500 (NYSEARCA:SPY) added 1.94% during the time frame.
VNQ is an extremely popular choice in the space with more than$17.0 billion in assets, but funds like IYR ($4.5 billion) and RWR ($2.0 billion) also attract sufficient investments. Among these, SCHH and FRI are slightly overlooked options with around $500 million and 150 million of AUM respectively.
Among the five, SCHH is the cheapest charging only 7 basis points in annual fees while VNQ and RWR cost 10 bps and 25 bps respectively. However, IYR and FRI are pricier funds charging 48 and 50 basis points individually, slightly higher than the average expenses charged by their other REIT cousins.