VNQ - RWR: The Time Might Be Now

2023-11-03 14:26:09 ET

Summary

• REITs have underperformed the broader stock market, but the SPDR® Dow Jones REIT ETF offers an opportunity to invest in the real estate market.
• The RWR ETF provides exposure to a diverse range of REIT securities and had a consistent yield over the last decade.
• RWR compares favorably to other REIT ETFs and could benefit from the Federal Reserve's decision to stop raising rates. However, rising interest rates and tighter lending policies pose risks to the fund's performance.

Anyone investing in real estate investment trusts, or REITs, over the last decade has been largely disappointed. Solid income and real assets, yes - but the reality is REITs have badly lagged the broader stock market using the S&P 500 (SP500) as a proxy.

I think that's about to change, which is why the SPDR® Dow Jones® REIT ETF (RWR) looks interesting here. This exchange-traded fund, or ETF, offers investors a unique opportunity to gain exposure to the real estate market, specifically through Real Estate Investment Trusts.

What is SPDR® Dow Jones® REIT ETF?

RWR is an ETF that primarily invests in publicly traded REIT securities in the United States. It seeks to emulate the performance of the Dow Jones U.S. Select REIT Index, providing investors with an opportunity to generate investment results that align with the index's total return performance, before accounting for fees and expenses.

The Dow Jones U.S. Select REIT Index is a market capitalization-weighted index of publicly traded REITs. These REITs operate under the REIT Act of 1960 and are characterized by their equity ownership and operation of commercial and/or residential real estate. The index serves as a proxy for direct real estate investing by excluding securities whose performance may be affected by factors other than real estate supply and demand.

Key Features of RWR

RWR stands out for its commitment to providing exposure to a diverse range of REIT securities. It invests in both growth and value stocks across various market capitalizations. Furthermore, RWR is a passively managed fund that uses a representative sampling technique to track the performance of the Dow Jones U.S. Select REIT Index.

Its yield has historically been in a solidly consistent range over the last decade.

The RWR fund exhibits a degree of stability with its attractive yield and liquidity. With its deep diversification and substantial investment in high-performing sectors like industrial REITs, healthcare REITs, data center REITs, and self-storage REITs, RWR has consistently generated steady yields for its investors.

The top ten holdings of RWR account for nearly 50% of its portfolio, with significant weight assigned to Prologis, Inc (PLD), Equinix, Inc (EQIX), Welltower Inc (WELL), Public Storage (PSA), and Digital Realty Trust, Inc (DLR), among others.

Peer Comparison

When compared to other REIT ETFs in the market, RWR holds its ground. The Vanguard Real Estate ETF ( VNQ ), for instance, is a popular REIT ETF with a solid track record. RWR's investment strategy is more conservative, focusing on traditional real estate sectors. The two on a relative basis have largely performed in line with each other.

The Future of REITs and the Role of RWR

With the Federal Reserve ceasing to hike rates, REITs could potentially perform well in the coming few years. Historically, REITs have generally outperformed both private real estate and the broader stock market during and after recessions. This resilience of REITs to economic uncertainties enhances the attractiveness of investing in a REIT ETF like RWR.

However, it's important to note that the commercial real estate sector, which constitutes a substantial portion of RWR's portfolio, faces potential risks from rising interest rates and tighter monetary and lending policies. This could impact the fund's performance in the future.

Conclusion

SPDR® Dow Jones REIT ETF presents a compelling investment opportunity for those seeking exposure to the real estate sector through a diversified portfolio of REITs. While its recent performance has trailed behind the broader stock market, its stability, attractive yield, and the potential upside of the REIT market make it worth considering here for a longer-term allocation.

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