There are 11 sectors under the global industry classification standard (GICS). Some, such as technology and healthcare, are homes to plenty of natural innovators.
Or sectors, well, not so much. Then there are the sectors that are just starting to evolve and innovate. Real estate is part of that group. Real estate has roots in being a boring, income-generating sector, but due to the evolution of various disruptive growth segments, real estate is getting significantly more interesting.
Thank concepts such as data center and industrial real estate investments (REITs). Technologies ranging from 5G to cloud computing are creating massive demand for data centers. Likewise, industrial REITs have been one of the best-performing corners for the real estate sector for several due to demand for warehouse space from online retailers, such as Amazon (NASDAQ:AMZN).
All of that is good news for clients. The bad news is that many of prosaic, low-cost real estate index funds and exchange traded funds advisors have been using for years to get clients real estate exposure lack adequate allocations to the aforementioned. Back to the good news: More ETFs are addressing the “sexy” areas of real estate. That includes the newly minted WisdomTree New Economy Real Estate Fund (WTRE).
Weighing In on WTRE
WTRE debuted earlier this week, so it’s likely not on many advisor custody platforms and it could take some time for that happen, but that’s not a knock on this fund. In fact, despite its rookie status, WTRE is one of the more compelling additions to the REIT ETF fray in sometime.
“WisdomTree believes that technology-focused real state exposure represents an increasingly important component of the future real estate market,” according to WisdomTree. “Built into WTRE’s strategy is a screen that targets companies with high technology exposure and strong balance sheets.”
The new ETF tracks the CenterSquare New Economy Real Estate Index (CSNERE), which refreshes the REIT index proposition in dramatic fashion. These days, clients should want exposure to data center, life sciences, logistics and telecom REITs. Conversely, with business travel still well below pre-pandemic levels and tens of thousands of brick-and-mortar retail stores to be closed in the years ahead, avoiding hotel, mall and retail REITs could be beneficial for clients.
The CenterSquare New Economy Real Estate Index checks those boxes for clients. For example, the benchmark more than three-quarters of its weight to data center, industrial and telecom REITs. A standard domestic REIT ETF will have about 30% to 35% -- perhaps a tad more – allocated to those types of REITs.
“WisdomTree believes that investing in real estate infrastructure with a focus on powering the growth of many different megatrends, or the ‘New Economy,’ represents an exciting investment opportunity at the junction of thematic investing and real estate,” adds the issuer.
Another Attractive Layer
As advisors well know, clients like the real estate sector for income. Of course, it’s best when those dividends are sustainable, meaning it’s a good idea to identify REITs with favorable funds from operations (FFO) and debt characteristics – the latter of which is highly important because real estate s a capital-intensive field.
Not only does WTRE’s underlying index screen for companies with high sensitivity to technology, it excludes those with debt-to-market-cap ratios in excess of 70%.
“WTREs weighting mechanism is designed to form a portfolio of securities that are technology focused and have attractive growth and valuation characteristics relative to the investable universe. The index methodology assigns a higher weight to companies with (1) stronger technology scores, (2) higher earnings, dividend and cash growth (3) and more attractive valuations relative to their levels of cash flow, earnings and dividends,” concludes WisdomTree.