January 21, 2014

After Slow ’13, REIT ETFs Lookin’ Up

Broad factors should lead to improvement in the sector, experts say, as real estate funds move into positive territory in January

U.S. REITs underperformed the broader equity market in 2013 for the first time in five years, the National Association of Real Estate Investment Trusts reported Monday. Of course, given the S&P 500’s 32.39% improvement last year, most industries had a hard time keeping up.

But in early 2014, the S&P 500 is in negative territory (-0.75%), and many ETFs with a focus on real estate have improved 2% or more.

The iShares Cohen & Steers REIT ETF (ICF), for instance, has moved up more than 3% since Jan. 1. The performance of the Vanguard REIT Index ETF (VNQ) is very close to 3% year to date.

Trading up by about 2.75% in ’14 are the First Trust S&P REIT ETF (FRI), Market Vectors Mortgage REIT ETF (MORT) and the Schwab U.S. REIT ETF (SCHH). Also, the iShares Dow Jones U.S. Real Estate ETF (IYR) has moved up roughly 2.5% in the first three weeks of the year.

“Real estate is a strategic more than a tactical investment, and real estate investors have historically been rewarded for a long-term orientation,” said NAREIT President and CEO Steven A. Wechsler, in a press release.

From 1992 through 2013, the FTSE NAREIT All REITs Index produced an average annual total return of 10.33% vs. 9.19% for the S&P 500, according to NAREIT. (A $10,000 investment in REITs at the beginning of that period would have grown to $86,965 at the close of 2013, compared with $68,128 for the same investment in the S&P 500 — a 26% greater payout.)

On a two-year basis as of Jan. 21, the SPDR Homebuilders ETF (XHB) outperforms the S&P 500 by a wide margin with an uptick of some 70% vs. roughly 40% for the major equity market index. Over the past five years, XHB shot up 200% compared with about 120% for the S&P 500.

NAREIT’s Wechsler also notes that real estate “provides diversification to an investment portfolio, potentially reducing its overall volatility.” At the end of last year, the correlation of the FTSE NAREIT All REITs Index with the S&P 500 was 65%.

Earlier this month, NAREIT analysts said they expected further strengthening of the economy to boost REIT earnings this year. Conditions in 2013 — namely interest rate concerns, the federal government shutdown and budget cuts imposed by sequestration — offset improving real estate fundamentals.

“We continue to see good news about the economy,” explained Calvin Schnure, NAREIT’s vice president of research and industry information. A stronger consumer, a reduced role for government, a firmer housing market and steady job growth are among the positive factors that could lead to improved REIT returns in 2014, he says.

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