AGNC - RIET ETF: An Attractive Choice For High Income But Not For Me

Summary

• Hoya Capital recently came out with a unique type of real estate ETF that aims for high income.
• RIET holds a combination of equity REITs, mortgage REITs, and REIT preferred stocks.
• I discuss the basic construction of the portfolio and how it might affect price appreciation and total returns.
• I explain why RIET is not for me but might be appealing to certain investors.

The Hoya Capital High Dividend Yield ETF (RIET) is an interesting hybrid ETF for the high-income seeker.

If you look, you can find ETFs that exclusively own equity REITs, others that exclusively own mortgage REITs, and still others that exclusively own REIT preferred stocks.

RIET owns a diversified mix of all three. The result is a portfolio that theoretically should enjoy the high income of mREITs and preferreds while still getting some of the capital appreciation of equity REITs. The primary goal is high income, but the fund does not want to completely sacrifice stock price upside in the process.

Of course, the risk of RIET is that investors will get neither the stable high income nor the price appreciation.

After all, the ETF specifically targets high-yielding securities. Mortgage REITs have a pretty consistent track record of capital depreciation over time. And for equity REITs, they typically offer high yields because the market perceives some risk that has caused a selloff in the stock. Sometimes the market is right about that risk and sometimes it is wrong, but there are few free lunches available in the stock market.

For the investor looking for a one-stop-shop for high-yield exposure to real estate, RIET is an attractive option to consider that fills a particular niche. But in the process of exploring the details of the ETF below, I'll explain why RIET isn't for me.

Overview of RIET

Though "Real Estate" isn't in the title of the ETF, you kind of get the idea of what it invests in via the ticker symbol of "RIET," a slight variation of "REIT" (real estate investment trust).

The underlying index uses a multi-step process to ensure wide diversification across not only types of assets or securities but also real estate sectors and market caps.

At the end of the day, though, RIET picks stocks based on yield - the highest yielders across a number of intersecting categories.

This results in the following portfolio breakdown:

In the words of Harry Markowitz, "Diversification is the only free lunch in investing." Having such diversification surely mitigates some of the risk of investing in high-yield securities.

Looking at the top 10 holdings of the fund, we find a healthy mix of mREITs, healthcare equity REITs, A-rated high-end mall landlord Simon Property Group ( SPG ), and net lease stalwarts like W.P. Carey ( WPC ) and National Retail Properties ( NNN ).

That said, the risks are still present. Putting several kinds of risky securities together into one portfolio does not eliminate those individual risks. In particular, there are certain types of holdings in RIET's portfolio that come with risks I personally do not wish to accept.

For example, ~12% of RIET is invested in office REITs, not including the exposure to office real estate via the commercial mREITs. Given the uncertainty about how work-from-home and hybrid work arrangements will ultimately affect office real estate, this exposure to office REITs is not particularly attractive to me.

Moreover, as stated above, mREITs for the most part have a poor record of generating price appreciation. That's another way of saying that the stock prices of these securities tend to drop over time.

Consider the price and total returns of the three largest mREIT holdings in RIET's portfolio:

• AGNC Investment Corp ( AGNC )
• Annaly Capital Management ( NLY )
• Rithm Capital ( RITM ) - former New Residential (NRZ)

AGNC and NYL (RIET's top two holdings) have barely produced positive total returns over the last decade because of high dividends but have delivered abysmal price returns. Meanwhile, RITM/NRZ has likewise put up negative price returns but has luckily thrown off enough dividends to have nearly doubled investors' money over the last ten years.

Mortgage REITs have performed especially poorly in the COVID-19 era. Compare, for example, the total returns of the two biggest mREIT ETFs - iShares Mortgage Real Estate ETF ( REM ) and VanEck Mortgage REIT ETF ( MORT ) - to Vanguard's broad equity real estate ETF ( VNQ ):

Since RIET owns equity REITs, mREITs, and REIT preferreds, where does its performance fall in the mix?

Let's compare the total returns of RIET to VNQ, REM, and the InfraCap REIT Preferred ETF ( PFFR ):

When it comes to total returns, RIET has performed most closely with REIT preferreds, but you can see that the general pattern has been the same for all types of REIT securities.

Though my concern that price appreciation will be sacrificed for high income has been made clear, it should be noted that RIET is not really trying to outperform VNQ in terms of total returns. The goal is high income, and on that front, RIET does deliver:

Since inception in September 2021, RIET has paid a steady monthly dividend. However, the most recently declared dividend for January 2023 raised the monthly distribution by 2.4%. Based on the newly declared dividend, RIET offers a forward dividend yield of 8.8%.

Bottom Line

To recap, my personal reasons for avoiding RIET are as follows:

• I fear the exposure to mREITs will result in poor capital appreciation over time.
• Systematically picking the highest yielding REITs across all 14 property sectors could result in essentially holding the riskiest companies with the shakiest dividends in each sector
• The portfolio has about a 12% exposure to office REITs, which I would like to avoid
• I prefer stock-picking
• I would rather sacrifice a little yield for extra dividend growth than focus solely on yield

As you can see, though, many of these factors are personal and subjective.

For the investor focused on high current income, however, RIET looks like an attractive option, certainly preferable in my opinion to an mREIT ETF or REIT preferred stock ETF due to its potential to participate in equity REIT capital appreciation.

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