The longer-term performance of the real estate sector “will lead to REIT dividend growth and ensure a stream of current income in an inflationary backdrop,” claims the Zacks report. It also noted that the yield on the 10-year U.S. Treasury note was 2.42% on January 6, 2017, while the annual return of the largest REIT—Vanguard’s REIT ETF (VNQ)—was about 4.72% annually, and the PowerShares KBW Premium Yield Equity REIT Portfolio ETF (KBWY) had a yield of about 6.52%.

Advisors don’t seem eager to embrace a submarket strategy, though. For publicly traded real estate strategies, LPL Financial’s chief economic strategist John Canally currently uses only the Dow Jones Global REIT (RWO) and mutual funds, the latter of which he notes will sometimes mention a hot rental market in a manager’s commentary. But “we would never say, ‘There’s a hot rental market in California, let’s buy [an ETF that] corresponds to that,’” says Canally. “We want to make sure ETFs are tradable. Investors should be concerned ... about how fast they can get out of them.”

Similarly, Rich Durso, director of financial planning for RTD Financial Advisors Inc., says RTD doesn’t invest so tactically as to pinpoint specific cities. “We only use a small portion of our portfolio for asset allocation diversification purposes. But we don’t target areas or neighborhoods.” Durso prefers Vanguard’s VNQ, which he says is very diversified. And he likes the low 0.12% expense ratio.

According to Todd Rosenbluth, CFRA’s director of ETF and mutual fund research, the ETF with the most exposure to residential REITs is the iShares Residential Real Estate Capped ETF (REZ), with $380 million in assets and 46% of the fund in residential REITs.

Most REIT products, including the VNQ, track the same MSCI U.S. REIT Index, which doesn’t specify geographical areas of rental holdings. But there may be more REITs with specific cities targeted. 

For example, Blackstone Group LP, which is invested in 117,000 multifamily units according to its website, is betting on rising interest rates hiking rental demand for single-family homes, which are currently held by its Invitation Homes unit. In January, Blackstone filed with the SEC for an IPO to create a REIT for investing in IH homes in 14 locations, named on the IH site. These include Atlanta, Las Vegas, Orlando, Sacramento and Tampa.

Bluerock Residential Growth REIT Inc. (BRG) is another residential REIT whose strategy is investing in target markets with relatively high expectations of rental growth, and according to its website it invests in the cities of Orlando; Atlanta; Charlotte, N.C.; and Roswell, Ga. Zacks gave the REIT its top rating, a strong buy, and a “Momentum Score” of “A” as of December 30, 2016. Morningstar listed the REIT’s annualized three-year total return on February 1 at $14.19. 

But there’s a dark side to creating more REITs, says Louis Stanasolovich, president of Legend Financial Advisors. ETFs following identical indexes may end up duplicating holdings. “The reality is that ETFs depend on a lot of liquidity—a lot of trading. And, underlying holdings could be one and the same.”

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