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It’s been a tough year for the real estate sector amid the ongoing coronavirus pandemic. Within Nareit’s universe of roughly 200 equity and mortgage REITs, the average real estate investment trust remains lower by more than 30%.
Back during the depths of the shutdowns on April 8, I published “No REIT ETF Is Pandemic-Proof, but These 3 Are Close.” At the time, every single REIT was trading in negative territory. Yet I discussed anyway how a few segments of the real estate universe would not only survive the pandemic…
They could actually thrive.
This included so-called “essential” property sectors like technology, industrial, and housing – ones American simply cannot go without. I also highlighted several real estate ETFs poised to benefit from both near-term pandemic effects and longer-term secular tailwinds.
Today, just three out of 26 of those listed in Morningstar’s U.S. Real Estate ETF category are in positive territory this year. But they’ve been some of my favorite and most widely-discussed funds nonetheless:
- Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF (SRVR)
- Hoya Capital Housing ETF (HOMZ)
- Pacer Benchmark Industrial Real Estate SCTR ETF (INDS).
Let’s revisit each and the trends driving them.
Technology REITs Powered by the Work-From-Home Era
Taking the top spot is the Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF. It holds 22 individual names, 13 of which are REITs.
SRVR is a pure-play way to invest in data centers, cellphone towers, and communications infrastructure REITs and C-corps – businesses set to capitalize on the buildout of 5G, online commerce, artificial intelligence, virtual reality, augmented reality, blockchain, and Internet of Things.
Data center REITs in particular have benefited from the shift from physical office space to remote-work infrastructure. Meanwhile, cellular network usage has surged as businesses and individuals stay connected via virtual interaction.
SRVR’s top 10 holdings include:
- Cell tower REITs Crown Castle (CCI), American Tower (AMT), and SBA Communications (SBAC)
- Data center REITs Equinix (EQIX), Digital Realty (DLR), and CyrusOne (CONE).
All of these are trading in positive territory this year.
Industrial REITs Are the Retail Apocalypse Winner
Next up is the Pacer Benchmark Industrial REIT SCTR ETF, which holds 17 individual names. All are REITs, and all are in the industrial and self-storage sectors.
INDS is uniquely positioned to capitalize on the explosive e-commerce movement. The significant acceleration here has propelled “retail apocalypse” trends even further. Retailers are diverting more of their capital away from malls and into distribution supply chains at a faster rate.
For INDS, nine of its top 10 holdings are in positive territory this year, led by:
- Cannabis-focused Innovative Industrial (IIPR)
- Prologis (PLD)
- Duke Realty (DRE)
- Rexford (REXR)
(Editor’s Note: We just published an update on IIPR in our Marketplace service.)
There’s No Place Like Home
Last but not least is the Hoya Capital Housing ETF. It’s advised by Hoya Capital Real Estate, a long-time Seeking Alpha contributor and now one to iREIT on Alpha too.
I initially discussed it in HOMZ: This High-Growth Real Estate ETF Is A Home Run. Sure enough, it’s continued to hit it out of the park as the second-best-performing fund in Morningstar’s real estate category this year.
HOMZ straddles the line between a REIT and homebuilder ETF. It invests in 100 companies poised to benefit from the ongoing tailwinds lifting the housing industry – not only during the pandemic but also over the next decade.
Residential REITs such as AvalonBay (AVB), Invitation Homes (INVH), and Equity Lifestyle (ELS) comprise roughly a third of HOMZ. The balance is invested in a diversified blend of high-quality companies across the red-hot U.S. housing industry:
- Home improvement companies Home Depot (HD) and Lowe’s (LOW)
- Homebuilders D.R. Horton (DHI) and Lennar (LEN)
- Real estate tech companies like Zillow (Z) and Redfin (RDFN).
(Source: HOMZ Investment Case)
HOMZ has proven to be a continued source of shelter during these volatile times. By investing in such a broad-based portfolio, it brings much-needed innovation and diversification to the housing ETF category.
Otherwise, the category includes more narrowly-focused funds like the iShares Residential and Multisector Real Estate ETF (REZ), SPDR S&P Homebuilders ETF (XHB), and iShares U.S. Home Construction ETF (ITB).
With an expense ratio at just 0.30% – making it the cheapest in the category – and a monthly dividend offering, HOMZ is a growth-oriented real estate ETF. It’s held its own throughout the pandemic, and it’s poised to do even more going forward.
This collection should capture the compelling macroeconomic themes expected over the next decade in the U.S. housing industry. The combination of historically low housing supply and strong demographic-driven demand should remain tailwinds throughout the 2020s.
It’s been a tough year for the larger real estate sector, forcing investors to be more selective than usual. But these three quality-focused “essential” ETFs – SRVR, INDS, and HOMZ – have survived the shutdowns and more.
The focuses they have on technology, industrial, and housing have benefited significantly from these near-term pandemic-related tailwinds. And we see more good things for them up ahead.
While that strong performance has pushed technology and industrial REITs too high to recommend to new investors, much of the housing sector remains “unloved.” Continuing to trade at historically attractive valuations even as the housing sector leads the early stages of an economic recovery…
That’s only going to last for so long. We expect to see more price appreciation as they continue to build off of quality convictions.
Author’s note: Brad Thomas is a Wall Street writer, which means he’s not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.
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Disclosure: I am/we are long HOMZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.