Investment flowing into exchange-traded funds (ETFs) focused on real estate this year has already eclipsed the 2013 total as concern over rising interest rates subsides and property markets improve.
In 2014, 31 percent of money going into U.S. sector-focused exchange-traded funds, or $3 billion through March 6, was for real estate, according to data compiled by Bloomberg. That’s 43 percent more than the net deposits the funds attracted in all of 2013, and a greater share of total ETF contributions than any time since at least 2012.
Investor expectations that interest rates won’t climb dramatically have made commercial property and mortgages attractive as the economy grows. Real Estate Investment Trusts (REITs) fell last year as the Federal Reserve said it would pare its unprecedented bond buying, which lowered borrowing costs for deals. Landlords are filling office, industrial and retail space amid a lack of new construction, brightening the outlook.
“If you trust the bond market, which we do, we’re in an OK environment for cost of capital,” said Jim Sullivan, managing director at Green Street Advisors Inc., a Newport Beach, California-based REIT research company. “We have enough economic growth to keep buildings full to allow landlords to push rents, not a lot, but a little.”
Vanguard Leads
ETFs are securities that track an index or basket of stocks or bonds in a given market or industry sector. They can be easily traded and come with low costs. Inflows to U.S. ETFs more than tripled to $183 billion last year from 2004, according to data compiled by Bloomberg.
Vanguard Group Inc.’s REIT Index ETF (VNQ) has led real estate products in attracting money with $1.25 billion in inflows in the past month. In second was BlackRock Inc.’s iShares U.S. Real Estate ETF, which gained about $506 million, according to Bloomberg data.
The biggest component of both ETFs is Simon Property Group Inc., the largest U.S. mall owner. The Indianapolis-based REIT has climbed 7.5 percent not including dividends this year after a 3.8 percent decline in 2013, its worst performance since 2008. The company in January reported an 8 percent jump in fourth-quarter funds from operations, a REIT measure of cash flow, as occupancies and rents climbed.
Investors put $97.5 million into the iShares Mortgage Real Estate Capped ETF (REM) in the past month, making it No. 4, Bloomberg data show. The ETF tracks an index made up of mortgage REITs, such as Annaly Capital Management Inc., its largest holding, which has returned 12.4 percent this year. The fund offers a yield, using calculations by the Securities and Exchange Commission, of 11.2 percent, according to BlackRock’s website.
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Vanguard REIT Index Fund (VNQ) and iShares Mortgage Real Estate Capped Find (REM) are components of the D2 Capital Management Multi-Asset Income Portfolio. They currently yield 3.95% and 14.61% respectively.Disclosure: I own the D2 Capital Management Multi-Asset Income Portfolio
The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.
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