Fear of inflation? 2 REIT ETFs to hedge against rising risks

(This article was originally written in English on June 14, 2022 and translated into Spanish for this edition)

Following the release of the consumer price index on June 10, analysts believe that the Federal Reserve will continue to raise rates. For consumers and businesses, the huge spike in food and energy prices is worrying.

Meanwhile, long-term equity portfolios have taken a hit as investors are rethinking allocation strategies to safeguard their capital. One asset class that gets more attention in inflationary times is real estate.

Wall Street offers a relatively convenient way to invest in real estate through publicly traded real estate investment trusts (REITs). They provide exposure to different types of physical properties both in the United States and in the rest of the world.

REITs often offer inflation protection, as long-term leases often have inflation protection built in. Also, shorter-term leases often reflect current price levels.

For example, the FTSE NAREIT All Equity REITs Index has outperformed the S&P 500 in 15 of the last 25 years. Also, its dividend yield of over 3.4% appeals to passive income seekers. By comparison, the S&P 500 dividend yield is now hovering around 1.6%.

However, on the other side of the equation is the negative effect of rising interest rates on REITs. As a result, the prospect of an increase in the cost of debt financing puts pressure on the sector.

So far this year, the US Real Estate Investment & Services index has lost more than 40% of its value. Although the drop is disconcerting to current REIT shareholders, it is also a good entry point into stocks in the sector.

With that information, here are two REIT exchange-traded funds (ETFs) that may appeal to readers looking for alternative investment options heading into the rest of the year.

1. The Real Estate Select Sector SPDR Fund

Current price: $39.19

52-week range: $39.02-$52.17

Dividend yield: 3.01%.

Expense ratio: 0.13% per annum

REIT sector revenues in the United States have exceeded $225 billion, with the sector expected to grow nearly 6% in 2022. The Real Estate Select Sector SPDR Fund (NYSE:) provides access to a number of companies of the US real estate industry. These REITs may include residential, commercial, and mixed-use real estate. However, the fund does not invest in mortgage REITs.

Item Description: XLRE Weekly Chart.

The XLRE tracks the Real Estate Select Sector Index and currently has 31 participants. It was listed for the first time in October 2015.

About 60% of the fund is concentrated in the top 10 stocks, making it a very concentrated fund. Among those top names are American Tower, Prologis, Crown Castle International (NYSE:), Equinix (NASDAQ:), Public Storage (NYSE:), and Digital Realty Trust.

At the end of January, the XLRE posted n all-time highs. However, 2022 has been the year of the fund’s REITs. Year to date, the ETF has lost more than 23% and is in bear market territory. At the time of this writing, the XLRE is also hovering around multi-year lows.

Price-to-earnings (PER) and price-to-book (P/BV) ratios stand at 37.25x and 3.32x. Investors in buy-and-hold REITs might consider investing in a low-cost fund like XLRE around these levels.

2. Vanguard Global ex-US Real Estate Index Fund ETF Shares

Current price: $43.77

52-week range: $43.77-60.50

Dividend yield: 7.94%.

Expense ratio: 0.12% per annum

In 2021, the size of the global real estate market reached almost 3.7 trillion dollars. Furthermore, between 2022 and 2023, it is projected to grow at a compound annual growth rate (CAGR) well above 5%.

The Vanguard Global ex-US Real Estate Index Fund ETF Shares (NASDAQ:) takes us out of the United States. Invests in global REITs, excluding US REITs.

VNQI Weekly Chart.

The VNQI, which tracks the S&P Global ex-US Property Index, lists 702 stocks. The fund began trading in November 2010 and has net assets of $5.1 billion.

REITs from the Pacific region represent more than 47.5% of the portfolio. Names from Europe, emerging markets and North America follow. The top 10 stocks represent more than 18.5% of the fund.

Major holdings include Germany’s Vonovia (ETR:), Australia’s Goodman Group, Japan’s Mitsui (TYO:) Fudosan and Mitsubishi (TYO:) Estate, and Britain’s Segro (LON:).

The VNQI has lost about 18.5% so far this year, changing hands at multi-year lows. The PER and P/VC ratios stand at 8.9x and 0.9x. Readers who expect the global footprint of REITs to continue to expand might consider this price drop as an opportunity to get started on the VNQI.


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(NOTE: If you are interested in the financial products I mention in the article and cannot locate them in your region, you may be able to ask your broker or financial manager).

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