While equity markets continue to witness massive outflows following Britain's decision to leave the European Union (EU), the real estate sector stands in good stead. ETFs from this sector attracted the highest volume of inflows among all equity sectors in June and over the first half of this year, according to State Street Global Advisors. A safe-haven appeal, impressive yields and the prevailing low-rate environment boosted demand for real estate ETFs.
Banking on these impressive fundamentals, favorably ranked real estate ETFs may prove to be profitable additions to the portfolio of any investor seeking impressive return even in this uncertain environment.
What is Boosting Real Estate ETFs?
The US ETF Flash Flows report from State Street Global Advisors showed that real estate ETFs registered inflows of nearly $1.4 billion and $5.3 billion last month and year-to-date, respectively, clearly outperforming in terms of popularity. Moreover, these ETFs also witnessed an inflow of $7.9 billion over the past one-year period, the highest among all the sectors. It is being speculated that Brexit uncertainties which prevailed for the most part of last month worked in favor of ETFs in safe-haven sectors including real estate.
Also, real estate ETFs drew investor attention owing to its feature of providing impressive dividend yields, especially when government bond yields declined to record low levels. Following Brexit, the 10-year U.S. Treasury yield, which serves as benchmark for consumer loans, tumbled more than 24 bps till July 5, to a record low level of 1.357%. Yields on the 30-year Treasury bond also touched the record low level of 2.15% on the same day.
Separately, the recent decline in mortgage rates is also expected to boost the demand for real estate ETFs. In the last week of June, the 30-year fixed-rate mortgage averaged 3.48%, down from 3.56% in the prior week. The 15-year fixed-rate mortgage averaged 2.78%, down 5 bps. Further, the 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 2.70%, declining from 2.74%. On the top of that, the Fed's decision to keep the interest rate unchanged throughout the first half of 2016 had a positive impact on real estate ETFs.
3 Real Estate ETFs to Buy
This favorable environment should strengthen the bull run of real estate ETFs and thus provide an ideal opportunity to invest in those that boast an encouraging Zacks ETF Rank. We have selected three popular real estate ETFs that carry a Zacks ETF Rank #2 (Buy) and have a Medium risk outlook.
Vanguard REIT Index ETF (NYSEARCA:VNQ)
This fund tracks the MSCI US REIT Index. In total, it holds 151 securities in its basket with 35.6% of its assets invested in the top 10 holdings. The fund is the most popular ETF in its space with $34.8 billion AUM and a solid daily average volume of more than 4 million shares. VNQ charges only 12 bps in annual fees, significantly lower than category average of 0.45%. The ETF gained 4.1% over the past one-month period and has a dividend yield of 4%. The ETF attracted $1.1 billion in net inflows in the last one month.
iShares Cohen & Steers REIT (NYSEARCA:ICF)
This ETF follows the Cohen & Steers Realty Majors Index. In total, it holds 30 securities in its basket with more than half of its assets invested in the top 10 holdings. The fund has $4.1 billion AUM and sees a moderate daily average volume of more than 200,000 shares. ICF has an expense ratio of 0.35%, lower than category average of 0.45%. The ETF gained 4.6% over the past one-month period and has a dividend yield of 3.4%. The ETF attracted $41.8 million in net inflows last month.
SPDR Dow Jones REIT ETF (NYSEARCA:RWR)
This fund tracks the Dow Jones U.S. Select REIT Index. In total, it holds 101 securities in its basket with 43.5% of its assets invested in the top 10 holdings. The fund has amassed $3.9 billion AUM and sees moderate daily average volume of more than 317,000 shares. RWR charges 25 bps in annual fees, lower than category average of 0.45%. The ETF gained 4.4% over the past one-month period and has a dividend yield of 3.5%. The ETF attracted $47.6 million net inflows last month.