There are times when set-it-and-forget portfolio allocations don’t work, especially when key economic shifts are underway. That’s when tactical, or satellite investments can augment a core strategic approach.
And such an approach is needed these days for real estate investment trusts (REITs). In August 2016, S&P Dow Jones Indices and MSCI carved out listed real estate companies (including REITs) from under the financials sector to a new 11th headline real estate sector under the Global Industry Classification Standard (GICS).
The timing was inauspicious. Since then, the Dow Jones U.S. Real Estate Index has slid nearly 12 percent, even as the S&P 500 Composite Index rose roughly 12 percent in that time. REITs and other income-producing sectors such as utilities and telecoms have seen investor demand siphon off in recent quarters as fixed-income yields become more robust.
Perfect Timing
Nuveen Investments launched a tactically designed ETF at the end of 2016 designed to blunt the impact of rising interest rates. The NuShares Short-Term REIT ETF (NURE) invests only in real estate properties that can deliver steady increases in leasing rates.
The fund, which carries a 0.35 percent expense ratio, invests in apartment buildings, hotels, self-storage facilities and manufactured home properties. Some of those properties, such as self-storage, can re-price their leases within six to nine months thanks to high turnover. “And hotels can actually re-price daily,” says Martin Kremenstein, head of retirement products at Nuveen Investments.
Studies have shown that REITs with shorter average contract lengths perform better in a rising rate environment, he says. Indeed, over the past 12 months this ETF has shed roughly 1 percent versus the 4 percent drop in the Vanguard Real Estate ETF (VNQ), the largest REIT ETF by a mile with assets of $29.7 billion.
Despite the Nuveen fund’s relatively short tenure, Kremenstein says the approach has already been validated through several past economic cycles. “We back-tested this approach before launching the fund and found that it consistently outperformed general REITs during times of rising rates.”
The Push And Pull
Even as REITs have been pressured by rising rates, it’s important to remember they are considered to be “pro-cyclical” and see steadily rising income as an economy grows. “As long as the economy is on a sustainable growth path then this growth factor outweighs the negative of rising rates,” says Fred Stoops, head of real estate investments at Vident Financial.