This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features Gary Stringer, president and chief investment officer of Memphis, Tennessee-based Stringer Asser Management.
The real estate sector was hit particularly hard during the early February equity market decline, which we think makes relative valuations more attractive for the sector in the near term.
Fundamentally, we expect the pace of economic growth in the U.S. to soften as many of the economic indicators that we track slip back to more normal levels from their current unsustainable levels.
As these indicators lessen, nominal gross domestic product (NGDP) growth, which was moving at an impressive rate in late 2017, will likely decelerate close to its long-term trend of roughly 4% over the next six to 18 months.
Given the long-term relationship between NGDP and the 10-year Treasury yield, we expect slowing NGDP growth will reduce the 10-year Treasury yield to approximately 2.5%. This environment should bode well for the defensive interest-rate-sensitive sectors that tend to perform well with falling long-term rates, such as REITs and related REIT ETFs.
Finally, strong demographic trends and continued U.S. economic expansion will likely support demand for apartment units owned by residential REITs.
For example, while the number of households has been increasing since the Great Recession, the annual rate is still well below prerecession levels. We expect the annual rate of household creation to rise, which supports demand for apartment units.
There are many options available for investors looking to add dedicated exposure to the real estate space.
At the time of writing, Stringer Asset Management held XLRE among its universe of ETFs included in its suite of ETF Portfolios. Stringer Asset Management is a Memphis, Tennessee third-party investment manager and ETF strategist. Contact Stringer Asset Management at 901-800-2956 or at [email protected]. For a complete list of relevant disclosures, please click here.