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06/23/16 05:00:29 PM
FUND STRATEGIES

REAL ESTATE USAGE CONTINUES TO CLIMB

Demand for US real estate securities accelerated in May, as exchanged traded funds focused on the investment segment gathered $1.31 billion of new money, up from $510.4 million in April. The popularity of REIT ETFs persisted last month even as health care and information technology ETF had net client withdrawals.

According to S&P Global Market Intelligence research, real estate securities are underweighted in many actively managed mutual funds ahead of the pending GICS sector elevation of REITs. Read more here https://t.co/QbChjo4GkX. However, passively managed securities providing exposure to the segment logged $3.5 billion of net inflows in the first five months, with assets totaling $47.82 billion at the end of May.

S&P Global Market Intelligence provides research and rankings on nearly 900 equity ETFs, including 29 REIT ETFs.

Vanguard REIT Index ETF (VNQ 86 Marketweight), which earns a Marketweight ranking, remains the largest of these ETF, at $31.39 billion, aided by $486 million of monthly inflows. Relative to the SPDR S&P 500 (SPY) ETF's 8.6% year-to-date gain through June 18 was stronger. VNQ pulled in $2.56 billion of new money in the first five months of the year.

Meanwhile, the $361.0 million in inflows for BlackRock's largest REIT product, iShares US Real Estate ETF (IYR 80 Marketweight), erased prior outflows. IYR, which earns a Marketweight ranking, has a higher expense ratio than VNQ, 0.43% vs. 0.12%, but trades more shares on a daily basis, 8.6 million vs. 3.7 million. However, the top-10 largest positions of both diversified ETFs include Simon Property (SPG 208 ****), American Tower (AMT 107 ****) and Public Storage (PSA 241 ***).

BlackRock also offers two more narrowly focused ETFs: iShares Mortgage Real Estate Capped ETF (REM 10 Overweight) and iShares Residential Real Estate Capped (REZ 65 Underweight). With $185.0 million of inflows, REM was more popular last month aided by its 10.6% year to date performance and its 10.9% dividend yield.

The largest holdings for REM, which also earns one of our Overweight rankings, include Annaly Capital Management (NLY 11 ***) and American Capital Agency Corp (AGNC 19 NR); the top-10 holdings represented 70% of total assets.

According to S&P Global Market Intelligence equity analyst Erik Oja NLY's focus on government agency mortgage backed securities is more appealing if the pace of the U.S. economic recovery moderates, and global political stability increases, leading to a gradual downward trend for longer-term U.S. interest rates.

In contrast, REZ earns a Underweight ranking. Ken Leon, an S&P Global Market Intelligence equity analyst, thinks multifamily oversupply and lower rent growth will negatively impact FFO growth and investment returns for many of the ETF's larger holdings, including AvalonBay Communities (AVB 176 ***). Leon sees more lease incentives ahead even with an employment market that remains stable across most local markets.

PowerShares KBW Premium Yield Equity ETF (KBWY 34 NR) remained the strongest-performing U.S. REIT ETF, among the products with more than $100 million in assets. The ETF, which is not ranked by S&P Global Market Intelligence due to a lack of analytical coverage of its holdings, rose 16 % year-to-date as of June 18; KBWY pulled in an additional $11.6 million in new assets. KBWY tracks an index that consists of small- and mid-cap REITs and is weighted based on the constituents' dividend yield.

The ETF's recent top-10 holdings include Government Properties Income Trust (GOV 21 NR) and Independence Realty Trust (IRT 8 NR), which have dividend yields of 8.4% and 9.6%, respectively.

Our reports on these stocks and ETFs can be found on this platform. To learn more about the elevation of REITs into a new GICS sector and hear more about our investment ideas, join S&P Global Market Intelligence for our June 22 webcast at 11am ET. Register for this event here http://bit.ly/1WO0mZV.

 

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