S&P: Look to ETFs Holding Multi-Family REITs (VNQ, ICF, REZ)

As the search for yield intensifies, income investors can rely on some familiar stomping grounds for robust payouts and elevated yields: Real Estate Investment Trusts. However, not all REITs are created equal and in a research note published today, S&P Capital IQ said investors should focus on those ETFs that are heavy on multi-family REITs. "S&P Capital IQ has a positive fundamental outlook on the residential REIT sub-industry, principally those trusts holding multi-family communities. In our view tight supply and a depressed single family housing market are combining to keep apartment buildings full while driving rental rates higher," S&P said in the note. In the note, S&P gave Markweight ratings to three REIT ETFs, which are as follows: The iShares FTSE NAREIT Residential Plus Capped Index Fund REZ, the iShares Cohen & Steers Realty Majors Index Fund ICF and the Vanguard REIT Index ETF VNQ. "In our view, many Americans may be reluctant to purchase a home until price stability returns. Moreover, we believe the number of potential renters is expanding due to a large cohort of echo boomers entering the work force. As the economic recovery gains steam, we expect an increase in household formations as young adults sever ties with their parents. Young adults, particularly those age 20-29, have a high propensity to rent," S&P said in the note. REZ, which focuses on residential, health care and self-storage REITs, is up 9.1% year-to-date, but that trails the SPDR S&P 500 SPY by 350 basis points. Residential REITs make nearly half of REZ's weight, so the fund could be in a position to move higher should S&P's forecast regarding rental rates prove accurate. FEZ, which turned five years old today, is home to 34 stocks, an expense ratio of 0.48% and almost $176 million in assets under management. The fund currently yields just over 3%. The iShares Cohen & Steers Realty Majors Index Fund has gained over 14% year-to-date, outpacing SPY in the process. Residential REITs account for over 19% of ICF's weight and the ETF currently yields almost 3.2%. Home to 31 stocks, ICF has almost $2.9 billion in AUM and charges 0.35%. VNQ is up 14.6% this year and that fund has an almost 19% allocation to residential REITs and a scant 0.12% expense ratio. One of the individual REITs S&P is bullish is Avalon Bay AVB, which garners a four-star rating from the research firm. S&P said Avalon Bay could be a leader in pursuing new opportunities in new markets while noting the REIT's funds from operations jumped by almost 19% in the first quarter. The stock is the ninth-largest holding in both ICF and VNQ. S&P gave a five-star rating to Essex Property Trust ESS, which is a top-20 holding in both VNQ and ICF.