I’m fairly positive on REITs as I’ve written about before given that we are entering an interest rate cutting cycle. REITs generally have underperformed for many years now, and I believe a lot of negativity is already priced in, especially when it comes to commercial properties. If you agree, you may want to consider the iShares Cohen & Steers REIT ETF (BATS:ICF). This is a passively managed exchange-traded fund that offers access to the largest names and brands in office, retail, residential, industrial, and other property sectors. And because REITs must by law pay out 90 percent of their income in dividends, it’s especially appealing for income-oriented investors.
A Look At The Holdings
ICF’s portfolio includes 30 REITs which tend to have market dominance in their respective property sectors. No position makes up more than 8.17% of the portfolio, making this relatively top-heavy.
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What do these companies do? American Tower Corporation is an owner and operator of wireless and broadcast communication real estate, leasing space on multi-tenant communications sites to wireless service providers, radio and TV broadcast companies, wireless data providers and utility companies. Prologis, on the other hand, is a global industrial REIT that owns and operates logistics real estate in the Americas, Europe, and Asia. Equinix, Inc is a data center real estate investment trust that offers colocation, interconnection and managed services to companies that use data, such as enterprises, content companies, systems integrators and network service providers. And rounding out the top 5 is Welltower Inc., which is a health care real estate investment trust that owns properties in senior housing and health care, including assisted living facilities, memory care communities and post-acute care centers.
Solidly diverse among the leaders in each REIT category. Something I think is a big positive.
Sector Composition and Weightings
ICF’s portfolio is spread across six subsectors, limiting concentration risk and providing balanced exposure to the REIT arena. Telecom Towers make up 16.5% of the fund, followed by Retail and Data Center REITs. Notice Office makes up about 4%, so if still worried about that part of the market, it’s not a big portion anyway.
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Peer Comparison
One fund worth comparing against is the Real Estate Select Sector SPDR Fund (XLRE). This fund tracks the Real Estate Select Sector Index, which includes REITs and real estate management and development companies. When we look at the price ratio of ICF to XLRE, we find that ICF is recently outperforming, but has largely lagged for 4-5 years.
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The top 10 positions look similar, but the weightings are different, which explains the performance differential overall. Both funds, I think, are good for broader exposure.
Pros and Cons
On the positive side, ICF gets you exposure to a broad basket of large-cap REITs that dominate their specific property sectors. These are the blue-chip equivalents of the REIT space. And there’s a decent yield at 2.9% with capital appreciation potential.
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The risk? Real estate cycles are affected by interest rates and consumer spending trends. The fund invests in REITs related to the retail, office, industrial, hospitality and self-storage property sectors that could be impacted by evolving consumer behavior and the workplace. And if rates don’t get cut soon, REITs likely continue to languish overall.
Oddly enough, I’d argue that the low office sector exposure is a negative. Given how much bearishness there’s been on office, the contrarian in me prefers a larger exposure there for more upside potential. That’s likely just me, though. I just think that’s probably the most undervalued REIT segment currently.
Conclusion
The iShares Cohen & Steers REIT ETF provides access to a widely diversified portfolio comprising REIT stocks. Since it is based on a REIT index, ICF benefits from the experience of Cohen & Steers, one of the most successful real estate investment firms in the United States, which might improve the fund’s likelihood of discovering attractive investment opportunities. I think overall it’s a good fund, and the cycle should start to favor it soon. It’s worth considering if you’re looking for yield and a different return pattern than you tend to see from typical stocks and bonds.
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