The Federal Reserve didn’t lower interest rates at its June meeting. And it’s not expected the central bank will do so next month. That means the next rate cut would arrive in September at the earliest. And there are not guarantees that will happen. Fed dithering on more accommodative monetary policy may be giving some market participants pause about embracing rate-sensitive sectors such as real estate.
But some market observers believe real estate is deserving of closer examination. Investors who don’t want to stock-pick in the group could consider ETFs such as the ALPS Active REIT ETF (REIT ) and the ALPS REIT Dividend Dogs ETF (RDOG )
The actively managed REIT could benefit from lower interest rates. That’s because its managers can allocate to real estate stocks poised to benefit from reduced borrowing costs in advance of or soon after that news is announced. With a trailing 12-month yield of 6.46%, RDOG possesses its own leverage to positive Fed action.
RDOG, REIT Offer Value
As Morningstar analyst Dan Lefkovitz pointed out, real estate is the worst-performing sector over the past five years both in the U.S. and globally. A long period of lagging doesn’t imply a reversal of that trend is imminent. But there is a value case for real estate stocks. And that could compel some income-hungry market participants to evaluate ETFs such as RDOG and REIT.
Investors should note that the real estate sector is home to various subindustries. And those groups don’t perform in uniform fashion. That’s because they’re affected by different macro factors.
“The performance of REITs isn’t all about interest rates, though. There are other risks out there weighing on REITs, all exacerbated by the coronavirus pandemic,” noted Lefkovitz. “Hybrid work has decreased demand for office space. E-commerce is a threat to brick-and-mortar retail. Home-sharing services and online travel have disrupted the hotel business.”
Avenue Worth Exploring
A potential takeaway from the above is that active management is an avenue worth exploring for real estate investors. That’s because agility is needed in this dynamic, evolving sector.
“There are plenty of REITs that have nothing to do with commercial real estate, shopping malls, or lodging. Some are even benefiting from secular trends. For instance, American Tower AMT operates cellular towers. Digital Realty’s DLR data centers are in demand from artificial intelligence. An aging baby boomer generation in need of healthcare should be a tailwind for Healthpeak Properties DOC added Lefkovitz.
Digital Realty and American Tower combine for over 7% of the REIT portfolio.
VettaFi LLC (“VettaFi”) is the index administrator and calculation agent for RDOG, for which it receives a fee. However, RDOG is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of RDOG.
For more news, information, and analysis, visit the ETF Building Blocks Channel.
