Inflationary pressures are running hot. So is chatter regarding what assets are least and most vulnerable to rising consumer prices.
As has been widely reported amid the 2021 inflation spike, real estate is historically one of the best-performing sectors in these environments, and some exchange traded funds are living up to that billing. For example, the ALPS Active REIT ETF (REIT) is higher by 22.40% year-to-date, an impressive showing when considering the fund debuted in late March, meaning that it missed out on nearly three months of trading.
With inflation proving to be more persistent than previously expected, some analysts believe the real estate sector can continue generating upside for investors. In a recent note to clients, Mizuho analyst Haendel St. Juste expresses a preference for apartments, industrials, shopping centers, and triple net real estate investment trusts (REITs).
REIT is an actively managed ETF, so its managers can overweight positions in those segments or other real estate groups presenting compelling opportunities if they see fit. REIT’s status as an actively managed fund is relevant to investors for several reasons, including the fact that it’s positioned as a concentrated fund. Frequently, REIT’s top 10 holdings will command approximately 60% of the fund’s weight, underscoring managers’ conviction in those names.
That’s beneficial at a time of low interest rates and high inflation — a pair of scenarios that usually favor REITs. Additionally, the real estate sector is delivering impressive earnings growth, robust fund flows, and elevated mergers and acquisitions activity.
“Inflation is a net positive for REITs because it pushes up replacement costs, which is an amount a REIT considers to replace an asset. But rising labor and material costs due to wide-spread shortages and supply chain bottlenecks are clear headwinds, St. Juste says,” according to Seeking Alpha.
The Mizuho analyst is bullish on select apartment and triple net REITs as well as some in the retail space, indicating that the segment is recovering from the pounding it took last year at the onset of the coronavirus pandemic.
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