ETF Of The Week: Real Estate Rebounds

August 10, 2018

The housing market may have stumbled recently, but real estate ETF investors aren't panicking.

In June, housing starts dropped 12.3% from May, their largest one-month fall in over a year. The trend is still upward, however, even if sales volume has been sluggish in the short term. "For now, I would tend to view the June downside surprise as more noise than signal," Stephen Stanley, chief economist for Amherst Pierpont Securities, told MarketWatch in July.

Meanwhile, plenty of ETF investors have scooped up the iShares U.S. Real Estate ETF (IYR) in recent weeks, likely lured by attractive valuations in a space hit hard by rising interest rates and the mid-February spike in market volatility (read: "Real Estate Sector Setting Up Nicely"). Since Aug. 1, more than $787 million has entered the fund.

Because of that, IYR has seen a short-term swell in assets under management, growing 22.8% over the past seven days—the most of any ETF with more than $200 million in assets under management.

IYR Vs. VNQ

With $4.7 billion in assets, IYR isn't the biggest fund in the U.S. real estate sector; that honor goes to the Vanguard Real Estate ETF (VNQ), which has a massive $32 billion in AUM. IYR was one of the first real estate ETFs to launch, however, and it remains a popular fund with investors (read: "Top REIT ETFs Show Similarities, Differences").

That's probably because IYR does exactly what it promises to do: It tracks U.S. real estate, and does so very well. IYR doesn't get fancy with its exposure; you won't find any factor slicing-and-dicing in this fund. Instead, it tracks a vanilla, market-cap-weighted index of the 127 largest real estate companies in the U.S. Names in this portfolio include American Tower Corp. (6%), Simon Property (5%) and Crown Castle International (4%).

IYR is more expensive than VNQ—it costs 0.43%, compared to VNQ's 0.12%—but traders like IYR's pennywide spreads and vast pool of liquidity. In fact, IYR appears to be the preferred way to place short-term bets on real estate. On average, IYR trades significantly more in market value in a day that VNQ does; the average daily volume for IYR is $635 million, compared to $396 million for VNQ.

 

Source: StockCharts.com; data as of Aug. 9, 2018

 

IYR is also significantly outperforming VNQ. Year-to-date, IYR is up 2.9%, compared with VNQ's 0.8% rise. The discrepancy is due to VNQ's index change, which began in February; before then, IYR and VNQ tracked fairly closely, as you can see in the above chart.

Where IYR goes next, however, likely depends on the next round of housing data, which is scheduled to be released on Aug. 16.

Contact Lara Crigger at [email protected]

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