Real Estate ETFs Keep Rocking

This year has been a perfect storm for real estate investment trusts (REITs) and the corresponding exchange-traded funds. Not only has the Federal Reserve passed on raising interest rates to this point in the year, but real estate will become the eleventh GICS sector at the end of August, providing another boost to REIT ETFs.

Investors are taking note of those themes, as real estate ETFs have been among this year's prolific asset gatherers at the sector level.

“Demand for US real estate securities accelerated in May, as exchanged traded funds focused on the investment segment gathered $1.31 billion of new money, up from $510.4 million in April. The popularity of REIT ETFs persisted last month even as health care and information technology ETF had net client withdrawals,” said S&P Capital IQ in a note out Wednesday.

A Dream-Home REIT?

The Vanguard REIT Index Fund VNQ remains a popular destination for real estate investors.

Related Link: More Help Coming For REIT ETFs

VNQ remains the largest of these ETF, at $31.39 billion, aided by $486 million of monthly inflows. Relative to the SPDR S&P 500 ETF Trust SPY's 8.6 percent year-to-date gain through June 18 was stronger. VNQ pulled in $2.56 billion of new money in the first five months of the year,” said S&P Capital IQ.

Interest Rates And REITs/REIT ETFs

REITs and the corresponding ETFs are sensitive to interest rates, and with the Federal Reserve now eyeing a July rate hike, these funds could be pinched in the near term. However, investors may be able to overlook one small rate hike when they know massive buying of REIT ETFs' components is coming in August, because active managers are massively under-allocated to real estate stocks.

“According to S&P Global Market Intelligence research, real estate securities are underweighted in many actively managed mutual funds ahead of the pending GICS sector elevation of REIT,” said S&P Capital IQ. “However, passively managed securities providing exposure to the segment logged $3.5 billion of net inflows in the first five months, with assets totaling $47.82 billion at the end of May.”

The PowerShares KBW Premium Yield Equity REIT Portfolio (PowerShares Exchange-Traded Fund Trust II KBWY), which was highlighted here last week, is another real estate benefiting from low interest rates and investors' thirst for yield.

KBWY “rose 16 percent year-to-date as of June 18; KBWY pulled in an additional $11.6 million in new assets. KBWY tracks an index that consists of small- and mid-cap REITs and is weighted based on the constituents' dividend yield,” said S&P Capital IQ.