Real estate investment trust (“REIT”) investors have lately been jumpy with an improving economy, a solid job report and an enhanced level of economic activity on one hand, and the associated anticipations of the Federal Reserve’s tightening cycle on the other. While positive data strengthens the industry’s fundamentals and builds demand for commercial properties, a rate hike would wipe out all the optimism. (Read: Beat the Market with Momentum ETFs)



In fact, the latest job report, which revealed that the U.S. economy created a total of 295,000 jobs in February, ahead of the consensus estimate of 235,000, signals a revival of the domestic economy. Unemployment rate, too, went down to six and a half year-low of 5.5% in February from 5.7% in January. That ripens the speculations for a rise in interest rates in June itself, sending the REIT stocks into the red with treasury yields climbing up.



Essentially, rising rates imply higher borrowing cost for the REITs. This affects their ability to purchase or develop real estate. Moreover, REIT stock yields become less attractive when treasury yields rise. (Read: NASDAQ ETFs in Focus on 15 Year High)



As such, total return of the FTSE NAREIT All REITs Index was 2.87% for the first two months, which was a tad higher than the 2.57% gain for the S&P 500.



Dividend Still Stands Tall



However, global uncertainties, both in the money and commodities markets, helped dividend-paying stocks gain much traction. Therefore, along with the capital appreciation, yield-hungry investors still have a large appetite for REIT stocks as the U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends.





In fact, as of Feb 27, 2015, the dividend yield of the FTSE NAREIT All REITs Index was 3.78%. The yield of the FTSE NAREIT All Equity REITs Index was 3.41%, while the FTSE NAREIT Mortgage REITs Index yielded 10.48%. Clearly, the REITs continued to offer solid yields and outpaced the 1.99% dividend yield offered by the S&P 500 as of that date. (Read: 3 European ETFs Seeing a Surge in Interest)



Capital Access



REITs have also been much active in the capital market for the first two months of 2015. They have opportunistically leveraged the low rate environment for refinancing their debts, which is encouraging.



As of Feb 27, 2015, REITs raised $15.76 billion in public capital (IPOs – $817 million, Secondary Common – $8.3 billion, Secondary Preferred – $1.4 billion and Secondary Debt – $5.2 billion) in Jan and Feb 2015 as against $6.53 billion in the comparable prior-year period.





Can REITs Tap an Improving U.S. Economy?



That the U.S. economy is improving has already been acknowledged by the Fed in its latest FOMC meeting. IMF and the World Bank, too, have concluded the same. And the recent economic data releases only reassure us regarding this recovery.



Economic recovery leads to ramped-up economic activity that could increase the demand for space from retailers, manufacturers, distributors, offices and renters. This is because a greater workforce needs more space for accommodation and enhanced purchasing power leads to higher demand for retail goods. This also translates into increased industrial activity, since their distribution needs logistic facilities, thereby increasing the demand for real estates. A fatter purse also means better-rent paying ability that drives the demand for apartments.



Therefore, going forward, if investors can gulp in short-term hiccups, the fundamental strengthening can ensure solid long-term gains. Also, these hiccups can offer you solid entry points.



Exploring the Sector Through ETFs



In this backdrop, we believe this is the right time to explore the sector through ETFs, so as to reap the benefits in a safer way. Considering the return prospects from dividend income and capital appreciation, we have tracked the following REIT ETFs, which could be worth considering:



Vanguard REIT ETF (VNQ)



The fund, launched in 2004, seeks investment results by tracking the performance of the benchmark – MSCI US REIT Index – which is used to gauge real estate stocks. The fund consists of 141 stocks, which acquire office buildings, hotels, and other real property. The top three holdings are Simon Property Group Inc. (SPG), Public Storage (PSA) and Health Care REIT, Inc. (HCN). It charges 10 basis points (bps) in fees (as of May 27, 2014). VNQ has managed to attract $55.2 billion in assets under management till Feb 28, 2015.



iShares U.S. Real Estate ETF (IYR)



Launched in 2000, IYR follows the Dow Jones U.S. Real Estate Index that measures the performance of the real estate industry of the U.S. equity market. The fund comprises 110 stocks with top holdings including Simon Property Group Inc., American Tower Corporation (AMT) and Crown Castle International Corp. (CCI). The fund’s expense ratio is 0.43% (as of Dec 31, 2014) and the 12-month trailing yield is 3.45% (as of Feb 27, 2015). It has around $5.3 billion in assets under management as of Mar 11, 2015.



SPDR Dow Jones REIT ETF (RWR)



Functioning since 2001, RWR seeks investment results of the Dow Jones U.S. Select REIT Index. The fund consists of 93 stocks that have equity ownership and operate commercial real estate, with the top holdings being Simon Property Group Inc., Equity Residential (EQR) and Public Storage. The fund’s expense ratio is 0.25% (as of Mar 12, 2015) and dividend yield is 3.06% (as of Mar 10, 2015). RWR has about $3.2 billion in assets under management (as of Mar 11, 2015).



Schwab US REIT ETF (SCHH)



This fund debuted in 2011 and tracks the total return of the Dow Jones U.S. Select REIT Index. The fund consists of 94 stocks that own and operate commercial real estates. The top three holdings are Simon Property Group Inc., Equity Residential and Public Storage. It charges 7 bps in fees (as of Feb 28, 2015), while the trailing twelfth month distribution yield is 2.05%. SCHH boasts $1.2 billion in assets under management (till Mar 11, 2015).



First Trust S&P REIT Index Fund (FRI)



Launched in May 2007, FRI is an ETF that seeks investment results of the S&P United States REIT Index, which gauges the U.S. REIT market and retains consistency, depicting the overall market composition. The fund comprises 149 stocks with the top holdings being Simon Property Group Inc., Equity Residential and Public Storage. The fund’s net expense ratio is 0.50% (as of May 1, 2014) and the 12-month distribution rate is 2.01%, while index yield is 3.66% as of Feb 27, 2015. FRI has about $ 338.9 million in net assets under management (as of Mar 11, 2015).



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