Real estate ETFs category typically feature above-average dividend yields and defensive traits. This makes the funds ideal strategies for a market environment where interest rates are falling, and investors are prizing defensive characteristics.
The FlexShares Global Quality Real Estate Index Fund (GQRE ) is one real estate ETF that could be right for these times.
GQRE, which debuted in November 2013, tracks the Northern Trust Global Quality Real Estate Index, a fundamentally-weighted index that focuses on commercial and residential REITs. Mortgage REITs, real estate finance companies, mortgage brokers and bankers, commercial and residential real estate brokers, and real estate agents and home builders are among the securities excluded from the index.
The FlexShares fund is up nearly 13% year-to-date and could deliver more gains as investors look to real estate, a sector that benefits when rates decline.
“For the first time in my career, we are moving to an Overweight on Real Estate, as interest rates around the globe are NOT going anywhere, and US rates are tethered to the global markets and thus heading lower,” said Jefferies analyst Steven DeSanctis in a recent note.
Global View on Real Estate
Investors perceive REITs as being a risky investment when rates rise, as it means more cash will have to be allocated to debt servicing. This could mean diverting away from dividends; the primary reason investors embrace REITs as an asset class.
GQRE allocates nearly half its weight to U.S.-based REITs, an essential factor, and one that should serve the ETF well, heading into 2015 as the Federal Reserve continues to put off raising interest rates. On that note, GQRE devotes a substantial portion of its geographic weight to countries that appear intent on keeping borrowing costs low for some time.
Real estate investors also enjoy attractive dividend yield-generation, which provides an alternative to bonds as a source of income. The sector offers yields that exceed sovereign and corporate investment bonds. Unlike bond coupons, real estate dividends can grow over time, which is invaluable in periods of high growth and inflationary environments. Additionally, due to real estate’s long-term leases, they provide a more reliable source of dividends than other equities. GQRE currently yields about 3%.
According to MarketWatch: “Quest for yield can be quenched by real estate,” DeSanctis noted.
For more information on the real estate investment trusts segment, visit our Real Estate ETF category.