RSPR: The Cycle Can Soon Favor REITs

seekingalpha05-26

REITs have struggled in recent years due to higher interest rates and concerns about commercial real estate defaults.The Invesco S&P 500 Equal Weight Real Estate ETF offers a unique equal-weighted ...

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PM ImagesReal estate investments trusts (REITs) have had a hard time the last several years as higher rates have served as a headwind for the sector broadly, alongside commercial real estate default concerns that linger. REITs are unique in that there are times when they act like a risk-on sector (benefit from lower volatility in stocks) and times when they act like a risk-off sector (benefit from higher volatility in stocks). Risk-on, or off, doesn’t matter long term though for the group, as I suspect there likely will be some prolonged outperformance ahead, just given how weak they’ve been for as long as they’ve been. If you’re in agreement, an equal-weighted approach to US real estate access via the Invesco S&P 500® Equal Weight Real Estate ETF (NYSEARCA:RSPR) might make sense. RSPS is an exchange-traded fund designed to track the investment results of the S&P 500® Equal Weight Real Estate Index. The index consists of companies in the real estate sector that are included in the S&P 500, and each constituent of the index is given an equal weighting in the portfolio. This equal-weighting approach is designed to mitigate concentration risk by underweighting larger, more expensive companies so that small or midsize companies are not underweighted compared with their market cap. ETF Holdings RSPR owns 32 stocks, spread equitably among them, each at around 3% of the total when rebalanced. The implication of the equal weighted approach here is that the top 10 positions got to be that way because those stocks naturally outperformed, resulting in higher relative weightings.   invesco.comSector Composition and Weightings The sector distribution of the RSPR ETF is reflective of the broader makeup of REITs. Multi-Family Residential REITs take the largest weighting with 19.14%, followed by Retail REITs with 16.32% and Health Care REITs with 9.88%. Sectors that follow are Telecom Tower REITs at 9.25% and Real Estate Services at 6.96%. Office REITs account for 6.59% and Hotels at 4.35%, with Data Centers accounting for a weight of 3.92%. The remaining range in the sector analysis comprises numerous sub-sectors such as Self-Storage, Timberland REITs, Diversified REITs, and Mortgage REITs. Nice mix here overall. I like that office REITs, where much of the concern has been, is a relatively low overall weight.   inveso.comPeer Comparison Although RSPR approaches the sector with an equal-weighted methodology, we need to look at its performance against other ETFs offering investment in the real estate sector. To do that, consider that Vanguard has a market-capitalisation-weighted real estate ETF that tracks the MSCI US Investable Market Real Estate 25/50 Index: its ticker is VNQ. When we look at the price ratio of the two, we find that the equal weight approach of RSPS has indeed outperformed, with less risk, than VNQ.   stockcharts.comPros and Cons On the plus side, the equal-weighting has the potential to reduce exposures and diversify across the board. Furthermore, because all the companies in the index are part of the S&P 500, you can be sure (at least to some degree) of quality and liquidity in the underlying holdings. The problem? The REIT sector as a whole is a rate-sensitive one. Rising financing costs could dampen REIT cash-flow and hurt the fund’s returns as higher rates bite into margins. It’s also of course possible that market-cap weighted REITs perform better than equal weight in the years ahead, as larger companies might fare better dealing with refinancing risk. And of course, a major issue remains the sensitivity of certain real estate sub-sectors to the behavior of consumers or to economic conditions. For example, the shift to remote work and rise of e-commerce changed the demand for office and retail spaces, which might be redirected toward other uses, curbing the performance of related REITs. The Verdict: To Invest or Not to Invest?  I like REITs and I like this fund. It’s well diversified, and I think a better reflection of the sector than market-cap weighted proxies here. REITs can help diversify returns, but also keep in mind they do tend to have solid yield as well. The current 30-Day SEC Yield is 3.6%, which is attractive relative to capital appreciation for many of these stocks. For those who seek a differentiated approach to real estate investing, the fund offers a tremendous opportunity, just as the cycle may finally favor these companies after a prolonged period of weakness.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.28.3","shortVersion":"4.28.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2438089842"}