This High-Yield REIT ETF Is On Fire

Perhaps the biggest reason investors embrace real estate investment trusts (REITs) is for the above-average yields. These days, finding income-generating assets with yields that beat the 1.6 percent on 10-year Treasurys is not difficult.

Even some traditional REIT exchange-traded funds yield north of 4 percent. Investors can do even better than by emphasizing high-yield corners of the REIT universe, which can be accomplished with the PowerShares KBW Premium Yield Equity REIT Portfolio (PowerShares Exchange-Traded Fund Trust II KBWY).

It's All In The Numbers

Two numbers standout regarding KBWY. The first is 12 percent, that being the ETF's year-to-date gain, which is nearly double that of the largest REIT ETF. The second is 5.57 percent, which is the ETF's 12-month distribution rate, meaning KBWY's yields 135 basis points more than the largest REIT ETF.

Related Link: More Help Coming For REIT ETFs

With above-average yields being one of the primary reasons income investors turn to REITs, it is notable that the asset class is participating in the recent dividend growth seen throughout the broader financial services sector. Real estate stocks will be classified as financial services names until late August when real estate separates into the eleventh S&P 500 sector.

KBWY tracks the KBW Nasdaq Premium Yield Equity REIT Index, which “is calculated using a dividend yield weighted methodology that seeks to reflect the performance of approximately 24 to 40 small- and mid-cap equity REITs in the United States,” according to PowerShares.

With its emphasis on high-yield smaller stocks (KBWY's holdings have an average market cap of $2.1 billion) and the REIT universe's own frothy valuations, it is not surprising that KBWY appears expensive as highlighted by the ETF's price-to-earnings ratio of over 51. REITs are seen as richly valued relative to the S&P 500, trading at an earnings multiple that is more than double that of the benchmark U.S. index and nearly triple that of the broader financial services sector.

Over the past five years, KBWY has outperformed the widely followed Dow Jones U.S. REIT Index by 113 basis points.