REIT Yields Disappointing Clients? New ETF Has the Cure

With interest rates low, value stocks in style and the economy emerging from its coronavirus funk, these should be go-go days for the real estate sector and real estate investment trusts (REITs).

Indeed, the widely followed MSCI US Investable Market Real Estate 25/50 Index is up 23.43% year-to-date. However, its yield of 2.38% leaves something to be desired. Yes, that's more than 100 basis points in excess of the yields on 10-year Treasuries and the S&P 500, but it's also well below what many clients are seeking when it comes to publicly traded REITs and the related funds.

A new ETF has the potential to cure some of the income blues clients are encountering in the real estate space. The new Hoya Capital High Dividend (NYSEARCA:RIET) is a cure for common real estate exposure and could serve to refresh the income proposition associated with this asset class.

RIET is Hoya Capital's newest exchange traded fund – the Hoya Capital Housing ETF (NYSEARCA:HOMZ) is the issuer's first ETF and recently topped $80 million in assets under management. The rookie ETF tracks the RIET Index Dividend Yield, which yields an eye-catching 6.70%, as of Aug. 31.

RIET Right Income Idea Right Now

Market participants often display reservations about new ETFs, often waiting for their counterparts to get involved first and then following suit. That's the definition of herd mentality and specific to RIET, it has the advantage of being a well-timed, relevant addition to the ETF landscape.

Clients and investors need income and many traditional income sources aren't delivering the goods in 2021. End users might do well to not get caught up in RIET's age, or lack thereof, and rather focus on its methodology and why the new fund could be an important yield-generating tool for income-starved investors.

“The RIET Index includes 100 high dividend yielding common and preferred securities issued by Real Estate Investment Trusts and real estate operating companies. The selection process incorporates a quality screen to identify REITs with lower leverage and begins by selecting ten 'Dividend Champions.' Securities are then selected based principally on dividend yield with diversification targets across real estate property sectors,” according to Hoya Capital.

In other words, RIET's lineup isn't solely dedicated to REITs. Rather, it has some flexibility and features “real estate-related securities.” The new ETF allocates 15% of its weight to the aforementioned dividend champions and another 10% to preferred stocks with the remainder of the lineup devoted to REITs.

Adding preferred stocks to the mix serves the objective of boosting RIET's income profile while setting the rookie ETF apart from established rivals. Preferreds are hybrid securities sporting both bond and equity traits. These stocks are issued by companies a la standard equity, pay fixed dividends akin to interest payments with bonds and are higher on the corporate asset totem pole than common stock but below corporate debt. Historically, preferred stocks perform well in low rate climates.

Targeting Income

Many clients may infer that REITs and the old school funds addressing the asset class are income ideas, but with yields low, RIET is a potentially compelling new ETF because it explicitly gets to the heart of the real estate income proposition.

Additionally, the new ETF has some avenues for growth possibilities because, unlike traditional REIT ETFs, it's not heavily reliant on large-cap stocks. In fact, of the rookie ETF's REIT exposure, 60% is directed to mid- and small-cap names.

Cost-conscious investors may like RIET, too, because Hoya Capital has a fee waiver on the fund, keeping its annual fee at 0.25% through at least Sept. 30, 2022. At the end of the day, RIET is a new ETF, but the battle to source income is not, indicating investors shouldn't scoff at RIET simply because of age.

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