REITs have been the top-performing asset class in eight of the past 22 years and are currently trading at substantial discounts, unveiling a compelling investment opportunity for long-term investors.
REIT values can drift from the net asset value of their underlying assets, leading to the REIT trading at premiums or discounts to NAV. Currently, REITs, in aggregate, are trading at about a 20% discount to the underlying real estate value, compared to a historical average premium of about 3%. Historically, when REITs have traded at such significant discounts, they have gone on to generate strong absolute and relative returns, particularly when compared to private market real estate.
Active management is particularly attractive in the real estate sector, as portfolio managers can capitalize on emerging opportunities and market dislocations as well as avoid unnecessary risk. In the last three years, 83% of active managers have outperformed their passive benchmark in the real estate sector, according to data from ALPS.
There are currently just four active REITs ETFs available to investors, including the ALPS Active REIT ETF (REIT ), the Avantis Real Estate ETF (AVRE ), the Cambria Global Real Estate ETF (BLDG ), and the Invesco Active U.S. Real Estate Fund (PSR ).
ALPS’ REIT comprises common equity securities of U.S. REITs, but may also include common equity of U.S. real estate operating companies (not structured as REITs), preferred equity of U.S. REITs, and real estate operating companies. The fund charges 68 basis points and holds 32 securities as of November 28, according to ETF Database.
AVRE invests in real estate stocks globally that are expected to have higher returns or better risk characteristics. The fund holds real estate companies stretching across a variety of property sectors, including REITs and REIT-like entities, located in countries including the U.S., Japan, Australia, the U.K., and Singapore, among others. The fund charges 17 basis points and holds 296 securities as of November 28.
BLDG provides income and capital appreciation by investing in a global basket of real estate securities including REITs and real estate management and development firms. The selection process uses Cambria’s multi-factor algorithm, which includes value, quality, and momentum. BLDG charges 59 basis points and holds 78 securities as of November 28, according to ETF Database.
PSR selects its investments primarily from a universe of securities that are included within the FTSE NAREIT All Equity REITs Index at the time of purchase. The selection methodology uses quantitative and statistical metrics to identify attractively priced securities and manage risk. The fund invests principally in equity REITs, holding 81 securities as of November 28, according to ETF Database. The fund charges 35 basis points.
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