Real estate has been one of the best performing sectors amid the COVID-19 pandemic thanks to a surge in home buying and home improvement projects. Like many other industries, housing saw a marked slowdown during the early part of the pandemic. However, the industry has experienced a sharp V-Shaped recovery, with mortgage applications hitting new highs. Record-low mortgage rates, a shortage of inventory, and purchaser bidding wars have driven real estate prices to unprecedented highs.
Real estate has been attractive historically because of its ability to deliver excess returns during bull markets, with a low correlation with traditional stock and bond investments. As a result, the sudden strong demand collided with an already low inventory market–due to slow homebuilding activity–sending total home sales in 2020 to 5.64 million, the highest level since 2006. In fact, home prices have appreciated at a double-digit rate each week for 26 straight weeks leading into January. The median listing price for a home was up nearly 13% compared to January 2020.
But investing in a property is capital intensive and sensitive to weekly interest rate fluctuations. Also, record low supply and all-time high prices are limiting purchases amid the exceptionally high demand. In addition, expectations of faster economic growth and inflation continue to push Treasury yields and mortgage rates higher.
Hence, many investors are turning exchange traded funds (ETFs) to benefit from their broad and diversified sector exposure at minimal operating costs. Real Estate ETFs generally invest in stocks issued by real estate investment trusts (REITs).
Here is a quick look at three ETFs that we think stand out to deliver exceptional performance as real estate prices continue rising: Vanguard Real Estate ETF (VNQ), iShares U.S. Real Estate ETF (IYR), and Real Estate Select Sector SPDR Fund (XLRE).
Vanguard Real Estate ETF (VNQ)
VNQ seeks to closely track the return of the MSCI US IMI Real Estate 25/50 Transition Index, a gauge of real estate stocks and other types of real estate companies, such as those involved in services and development and other REITs. The ETF holds a diversified basket and its market-cap allocations mirror those of the neutral benchmark. The only place it deviates from the benchmark is its sector bias away from specialized REITs in favor of commercial REITs. It thus offers broad exposure to companies involved in the ownership and operation of real estate.
VNQ has an MSCI ESG Fund Rating of BBB, which is based on a score of 4.56 out of 10. The ETF currently has $33.7 billion in AUM and an expense ratio of 0.12%. VNQ also pays an annual dividend of $3.34, which translates into a 3.76% yield.
In terms of exposure, VNQ is heavily weighted towards Specialized REITs, with a 39% weighting. The portfolio also has a 13.6% and 11% exposure to Residential REITs and Industrial REITs, respectively. The top three among the fund’s 174 holdings are Vanguard Real Estate II Index Fund (VRTPX), American Tower REIT Corp (AMT) and Prologis REIT Inc (PLD).
VNQ closed yesterday’s trading session at $88.41, with a year-to-date gain of 4.1%. The ETF has advanced 8.6% over the last month and has seen net inflows of 1.81 billion during that . KARS is trading just 11.6% below its all-time high of $99.72.
VNQ’s strong fundamentals are reflected in its POWR Ratings. The ETF has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.
VNQ also has an A grade for Trade grade and a B for Buy and Hold grade. It is ranked #8 of 27 ETFs in the C-rated Real Estate ETFs group.
Beyond what we stated above, we have also given VNQ grades for Peer. Get all VNQ’s ratings here.
iShares U.S. Real Estate ETF (IYR)
IYR is among the first-launched U.S. real estate ETFs and has been a stalwart of the space. The fund tracks the Dow Jones U.S. Real Estate Index, which has fewer than 100 holdings, diversified primarily across large and mid-cap size companies. The ETF captures much of the real estate space, including REITs and firms that invest directly or indirectly in real estate through development, management, or ownership, including property agencies.
IYR has an MSCI ESG Fund Rating of BBB, which is based on a score of 4.42 out of 10. The ETF has $5.5 billion in AUM and an expense ratio of 0.42%. The fund pays an annual dividend of $2.21, translating to a yield of 2.50%.
The fund is exposed to various industries, with Specialized REITs leading the way with a 37.8% weighting. The ETF has an exposure of 14.5% and 10.4% to Residential REITs and Industrial REITs, respectively. The top three among the fund’s 82 holdings are AMT, PLD and Crown Castle International REIT Co (CCI).
With a year-to-date gain of 3.1%, IYR closed yesterday’s trading session at $88.30. The fund has witnessed a net inflow of $1.7 billion over the past six months, and the ETF is up 7.8% during the same period. IYR is currently trading 12% below its 52-week high of $100.39.
IYR’s POWR Ratings reflect a promising outlook. IYR has an overall rating of B, which equates to Buy in our proprietary rating system.
It has a Trade Grade of A and Buy and Hold Grade of B. It is ranked #9 in the Real Estate ETFs group.
Click here to check additional POWR Ratings for IYR (Peer and Category).
Real Estate Select Sector SPDR Fund (XLRE)
XLRE tracks a market cap-weighted index of REITs and real estate stocks, excluding mortgage REITs, from the S&P 500. XLRE was launched in October 2015 following a decision by S&P and MSCI to split the GICS financial sector into two new sectors: financials and real estate. XLRE represents the new real estate sector, although mortgage REITs remain in the financial sector. XLRE seeks to provide specific exposure to companies in real estate management and development and REITs, Like the rest of the sector’s SPDR suite, it holds a concentrated portfolio of mostly large-cap names.
XLRE has an MSCI ESG Fund Rating of A, which is based on a score of 6.13 out of 10. The ETF currently has $2.28 billion in AUM and an expense ratio of 0.12%. The fund also pays an annual dividend of $1.15, translating to a 3.03% dividend yield.
XLRE has more than 45% exposure to Specialized REITs. This is followed by the Commercial and Residential REITs, with 41% and 11% weightings, respectively. Of the 31 constituents of the fund, the top three holdings by XLRE are AMT, PLD and CCI.
XLRE has gained 3.9% so far this year to close yesterday’s trading session at $37.97. Despite generating net outflows of $135.3 million over the past six months, the ETF is up more than 5% in the same period. XLRE is currently trading just 9.6% below its 52-week high of $42.00.
It is no surprise that XLRE has an overall rating of A, which translates to a Strong Buy in our POWR Ratings system. XLRE also has a grade of A for both Trade and Buy and Hold. It is ranked #1 in the Real Estate ETFs group.
Click here to see the additional POWR Ratings for XLRE (Peer and Category).
The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.
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VNQ shares were trading at $89.26 per share on Friday morning, up $0.85 (+0.96%). Year-to-date, VNQ has gained 5.10%, versus a 4.85% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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