Even as many parts of the world remain in the throes of the relentless pandemic, exchange-traded fund investors are headed back to the office … and more.
“The reopening trade has lifted all real estate investments trusts, regardless of the interest rate outlook,” said Gargi Chaudhuri, head of iShares investment strategy, Americas, at BlackRock Inc. Accessed through ETFs, REITs offer higher yields in a low-interest-rate environment, low correlation to other asset classes, liquidity in a less-liquid asset class, and a natural inflation hedge, Ms. Chaudhuri said.
BlackRock’s analysis shows that REITs are 30% to 45% more sensitive to inflation relative to the broad equity market, Ms. Chaudhuri said. “In other words, if we get that rise in inflation expectations, REITs would rise in value by a factor of 1.3 to 1.45.”
Current yields for the 52 real estate ETFs tracked by CFRA Research range from roughly 2% to 6%, but activity has been picking up across the board.
“Flows to real estate ETFs are standing out relative to traditional defensive sectors,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA. “And the flows have been relatively broad-based, with several products gathering over $100 million this year. It’s not just VNQ — the Vanguard Real Estate ETF,” he said.
Of the nine REIT ETFs adding more than $100 million in net assets so far this year, the Invesco KBW Premium Yield Equity REIT ETF added 33% of its $340 million in total assets and the J.P. Morgan BetaBuilders MSCI US REIT ETF added 20.5% of its $1.4 billion in total assets.
Still, VNQ eclipses its competitors like few other ETF strategies.
With $38 billion in assets (and the largest share class of a $68 billion fund), the ETF has a 0.12% expense ratio and holds 174 U.S.-listed real estate investment trusts. However, the next largest product by assets, the $6.5 billion iShares U.S. Real Estate ETF (IYR), with an expense ratio of 0.42%, has greater daily secondary market liquidity.
In aggregate, U.S.-listed real estate ETFs had $80.4 billion in assets under management through May 3, according to CFRA. Net inflows were $3.9 billion compared to a net outflow of $2.2 billion for 2020. One notable exception in 2020 was the $1.1 billion Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF, which gathered $831 million last year alone as the pandemic highlighted the importance of data centers and communications towers to a socially distanced world.
REIT ETFs have had a median total return of 15.1% in 2021 through May 3, compared to a median decline of 7.3% for 2020.