Why Income Investors Should Look to a Short-Term REIT ETF
EInvestors in exchange-traded funds should consider a differentiated approach to selecting real estate investment trusts, especially the benefits of short-term REITs that could help improve a portfolio and better manage potential risks.
In the recent webcast, Why Short-Term REITs Make Sense NowAlex Graf, ETF, Institutional Models and ESG Specialist, Nuveen, explained that REITs are companies that own or manage income-generating real estate assets. Without having to own physical property, individual investors can also invest in publicly traded REITS and earn attractive dividends on those securities. Graf also pointed out the long-term benefits of short-term REITs, which can adjust prices more frequently than longer-term REITs, can adapt more quickly to changing market conditions, and may be less sensitive to rate fluctuations. of interest.
As investors look for ways to meet their income goals, many are faced with the prospect of taking on more risk for their portfolios, especially in an environment of lower interest rates for longer. Therefore, Graf expressed his belief that expanding and diversifying the source of risk are both essential to an income strategy. This is where REITs could offer competitive returns to income-conscious investors.
“As investors contemplate the implications of economic uncertainty in capital markets, now is a good time to reconsider the rationale for real estate in multi-asset portfolios,” Graf said. “For investors re-evaluating risk and reward, real estate can meet a need for diversification, performance and, most importantly, return, in a world lacking in income.”
Michael Orzano, Senior Director of Global Equity Indices, S&P Dow Jones Indices, highlighted the Dow Jones US Select REIT indexing methodology as a benchmark for investors to assess the real estate market. Orzano explained that the components of the Dow Jones US Select REIT Index are categorized into short, medium and long term based on the typical average lease term of different REIT sectors.
Specifically, the short-term compartment includes REITs like apartments, hotels, manufactured homes and self-storage. The medium term compartment covers industrial, mixed, industrial / office, shopping malls, outlet stores and diversified REITs. Finally, the long-term compartment includes healthcare, regional shopping centers and office REITs.
Orzano noted that these varying REIT lease terms also exhibit varying degrees of interest rate sensitivity. For example, when comparing sub-sectors to the broader Dow Jones US Select REIT Index during periods of rising interest rates, the frequency of outperformance was highest among short-term sectors such as hotels 100% of the time, apartments 67% and self-storage 67%.
“The Dow Jones US Select Short-Term REIT Index outperformed the wider REIT market during short-term peaks in the 10-year Treasury yield with greater consistency during higher magnitude rate hikes “said Orzano. “The index has neither outperformed nor underperformed during times of falling rates.”
For example, the Dow Jones US Select Short-Term REIT REIT has offered downside protection during recent episodes of rising rates.
REITs with shorter-term leases “have generally outperformed the Dow Jones US Select REIT during periods of peak interest rates, in part due to their ability to revise their prices faster than other market segments. REITs, ”Graf said.
Orzano noted that the short-term REIT segment exhibited improved risk / reward characteristics compared to the larger REIT market. They have shown higher returns in all time periods measured, coupled with lower long-term volatility, and the short-term segment has shown a similar dividend profile over a five-year average despite recent declines.
In order to help investors capture the average length of short-term leases in the REIT space, investors can look to NuShares Short Term ETFs (BATS: NURE), which attempts to mirror the performance of the Dow Jones US Select Short-Term REIT Index. The fund’s strategy provides access to REITs with short-term leases which may be less volatile and sensitive to changes in interest rates than longer-term REITs, with the potential for attractive risk-adjusted returns.
Financial advisors who want to learn more about real estate investment trusts can watch the webcast here on request.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.