Sternlicht’s Starwood Woes Put ETF Benefits on Display

This may be one of those rare times where investors actually think “Wow, I’m glad I’m not that rich.” 

Barry Sternlicht's Starwood Real Estate Income Trust property fund, one of the largest nontraded REITS with $10 billion in assets, is facing liquidity constraints. Last week, it delivered the type of news that wealthy investors in private funds have heard at some point in practically every business cycle: we are cutting or eliminating the amount we pay you each month.  

In the case of Starwood, it was about an 80% cut, from roughly an annualized 12%-20% rate to 4%. And, while the restrictions are expected to be temporary, my memory recalls hearing that language in the past—as in during every other asset price cycle that eventually topped out.  

If this is the start of something worse, ETF investors can take some solace. Some of the top real estate investors like Starwood and Blackstone (which limited redemptions in 2022 before they were later reversed) are not readily accessible with intraday liquidity, but the vast majority of the 62 Real Estate Investment Trust ETFs listed in etf.com’s database are. They trade on the stock exchanges.  

Real Estate ETFs Suddenly Look Sexy

And while their underlying holdings can run into trouble, the REIT ETF itself can be bought and sold every day, during market hours, at a price reflecting the market value of that underlying basket of real estate-related securities. So, there are tradeoffs between sexy private REITs and relatively pedestrian REIT ETFs. But until the big private firms do their best Justin Timberlake and bring sexy back, ETF investors might be in the REIT catbird seat.

No one knows where bond rates will go, but there is at least a hint that they may head south, based on a developing technical breakdown in the chart of the 10-year US Treasury yield. That could be a relief to publicly-traded REIT ETFs such as the Vanguard Real Estate ETF (VNQ), which dominates the assets in this space with nearly $32 billion. VNQ is off 5.2% so far in 2024, but has rallied back 2% over the past one month.

VNQ yields just 4.2%, like many of its REIT peers. That’s a far cry from what the private funds spin out in good times. For those looking to narrow that payout gap, funds like the Invesco KBW Premium Yield Equity REIT ETF (KBWY) may be worth some research effort. 

Public vs. Private REITs

That 30-stock fund focuses 45% of its assets on its top 10 holdings, which include a range of office, healthcare, and residential real estate businesses. KBWY is a $190 million ETF, has delivered a 10% return in the past 12 months, and yields 8.2%. It reflects the challenging times for smaller cap stocks of all varieties, as its average market cap is just $3.2 billion.

As with all investment decisions, private versus public REITs have everything to do with individual preferences and qualifications. Investment advisors handle those decisions for clients, and self-directed investors serve as their own asset management boss. Either way, the contrast is now on full display.