3 Targeted ETF Strategies For Investing In Real Estate
Having just passed the one-year anniversary of the 2020 bear market lows, the stock market rebound has largely affected how one might expect to emerge from an economic trough. The stocks have come back. Riskier asset classes including cyclical stocks, high beta stocks and small caps have outperformed while low volatility and defensive issues have lagged.
The real estate sector has been one of those laggards, and it’s easy to see why. REITs rely on rents and mortgage payments to generate income. If you don’t have them, REITs will go down in value. As businesses collapsed and many mortgage forbearance programs became available, the once predictable streams of income became very uncertain.
However, it looks like the worst is over. Forbearance rates are still high compared to historical norms, but they have steadily declined. With stimulus cash and soft loans, consumers and businesses should be able to resume monthly payments as usual and bring the real estate sector back closer to what it used to be.
I don’t think this necessarily means investing in a broad real estate ETF. Sure, this will do the job of getting you excited about the sector, but there’s a ton of hit-or-miss potential beneath the surface. Mall REITs, for example, are likely to continue to have problems even after the economic upswing. Who knows what will happen to office REITs as so many workers and companies have gotten used to the new remote work economy. Even things like hospitals and healthcare facilities could face a lot of unknowns.
For this reason, I think it makes sense to target your real estate investments at the sub-sector level. Here you can narrow your choices down to those areas of the market that could particularly benefit from the global economic recovery, as well as broader trends that will evolve over time.
Based on where I think the economy is headed, here are my three favorite targeted ETF strategies for investing in real estate.
Pacer Benchmark Data and Infrastructure Real Estate SCTR ETF (SRVR)
I think the investment case for SRVR is pretty straightforward. Infrastructure will be a major issue in the 2020s and a lot of investments will be made in this sector. With the completion of the latest stimulus package, the Biden administration is already drafting an infrastructure bill that could approach $ 3 trillion in total. It would likely target things like roads, railways, bridges, clean energy, and telecommunications equipment.
The latter piece is particularly attractive. There is a lot of effort going on to massively advance the development of 5G features. That alone could require a significant investment, but it is the direction of the world and could be a strong growth game over the next few years.
SRVR is aimed at REITs whose tenants include wireless carriers, broadband providers, government agencies, cloud providers, internet media and communications companies. These are the companies that can also play a pioneering role in the development of blockchain, artificial intelligence, the Internet of Things and augmented reality. The top positions currently include American Tower, Crown Castle, Equinix and Iron Mountain.
Income investors might look at the 2.3% return on SRVR and decide it isn’t worth the effort. While SRVR is one of the lower return options in the REIT space, this is more about growth than income. Certain sectors within the real estate space are more mature and focused on generating income. Infrastructure is more about putting cash into growing your businesses rather than generating income. This ETF might make a nice addition to a traditional real estate ETF, but it won’t be a great generator of returns on its own.
Hoya Capital Housing ETF (HOMZ)
If you’re looking to get involved in the booming US real estate market, why limit yourself to just residential REITs? There is so much that falls under the term “housing” that it might make more sense to use an ETF that covers all aspects of the housing market.
HOMZ does just that. According to its website, “HOMZ invests in 100 domestic companies in the housing industry, including REITs for residential real estate, home builders, home improvement, and real estate services and technology companies.” Part of the portfolio gives you this traditional REIT coverage, but you also invest in all those companies that benefit indirectly from the real estate market. Think of companies like Home Depot, Lennar, home furnishings providers, mortgage lenders, and others.
I’ve been a fan of HOMZ for some time due to its varied structure and this year it has paid off. The fund is up more than 13% year-to-date compared to 6% and 7% returns for the real estate and mortgage REIT sectors, respectively.
The 1.9% return won’t upset income seekers very much either, but HOMZ is only 30% invested in REITs so that’s to be expected.
NETLease Corporate Real Estate ETF (NETL)
NETL is a better return option and currently pays around 4%. Net leases are an interesting approach to real estate investments. According to the website, “Net Lease REITs are equity REITs that own properties that have been rented to individual tenants under long-term net leases that state that the tenant is responsible for most, if not all, of the property costs in addition to the rent The most common net lease is a “triple net lease” where the tenant pays property taxes, insurance and maintenance – the three networks in one lease. “
The benefits of investing in net leases include more predictable cash flows, the deductibility of certain income from REITs, inflation protection, and rental escalation provisions on leases that can help earnings grow and keep pace with inflation.
NETL’s top 4 sector allocations include Industry, Retail, Hotels & Games, and Restaurants. I’m not a big fan of the retail allocation, but the other sectors should in theory do well to the recovery.
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