2 Real Estate ETFs For Passive Income
Investing.com | Feb 19, 2021 09:38AM ET
Real estate is one of the most important sectors of the US economy, and Real Estate Investment Trusts (REITs) typically get significant investors attention. In the US, regulations require REITs to distribute 90% of their annual taxable income through dividend payments. Therefore, they tend to be a popular asset class among passive-income seekers.
The current monetary environment supported by the Fed typically favors REIT investments. Record-low interest rates mean lower borrowing costs for REITs, which can expand operations by developing or purchasing more real estate.
We recently covered the iShares Residential and Multisector Real Estate ETF (NYSE:REZ). Today, we'll discuss two other ETFs that could be of interest to readers.
1. Vanguard Real Estate ETF/h2 - Current price: $88.41
- 52-week range: $55.58 - $99.72
- Dividend yield: 3.72%
- Expense ratio: 0.12% per year
The Vanguard Real Estate Index Fund ETF Shares (NYSE:VNQ) invests in publicly traded equity real estate investment trusts (REITs). Since its inception in September 2004, net assets have grown to $61.5 billion. It is one of the largest and most widely-followed real estate ETFs.
VNQ, which tracks the returns of the MSCI US REIT, has 174 holdings. The top three sectors of the fund include specialized REITs (38.9%), residential REITs (13.6%), industrial REITs (11.0%), retail REITs (9.3%), and health care REITs (8.8%). Specialized REITs typically invest in telecommunications and data center spaces, recent growth sub-sectors.
The ten largest holdings constitute over 46% of that assets. In other words, the ETF is heavily weighted in those stocks whose performance might affect VNQ. The top five names are the Vanguard Real Estate II Index Fund (NASDAQ:VRTPX), American Tower (NYSE:AMT), Prologis (NYSE:PLD), Crown Castle International (NYSE:CCI) and Equinix (NASDAQ:EQIX).
In the past 12 months, VNQ declined by almost 10%. But, year-to-date, it has returned 5.4%. We like the sub-sectoral diversity offered by the fund and would look to buy the dips in price.
2. VanEck Vectors Mortgage REIT Income ETF /h2 - Current Price: $17.31
- 52-Week Range: $6.80 - $25.94
- Dividend Yield: 7.68%
- Expense Ratio: 0.41% per year
The VanEck Vectors Mortgage REIT Income ETF (NYSE:MORT) provides exposure to US mortgage REITs, also referred to as mREITs.
Recent research by Eva Steiner of Cornell University highlights:
"Mortgage REITs (MREITs) are specialized investment vehicles that invest in whole mortgages and/or mortgage-backed securities (MBS). They represent an important source of credit in the US mortgage market."
National Association of Real Estate Investment Trusts (NAREIT) points out extended the eviction moratorium through June 30.
This recent move by the administration was seen as a positive move for the sector. Otherwise, homeowners currently in forbearance might have been moved to delinquency in April, potentially creating a domino effect on the availability of credit in the mortgage market. Mortgage giants Federal Home Loan Mortgage Corporation, known as Freddie Mac (OTC:FMCC), and Federal National Mortgage Association, known as Fannie Mae (OTC:FNMA), typically guarantee many of these mortgages.
It is too soon to know how the economy and the housing market will fate in the summer months. In the case of increased delinquencies, both Freddie Mac and Fannie Mae could incur liquidity drawdowns. Then, a significant number of mREITs might also find themselves in a difficult financial position. So, in the months ahead, there could be increased risks in the mortgage market.
Over the past year, MORT is down over 31%, but returned close to 5% since the start of 2021. Passive-income seekers who do not expect heightened risk in the mortgage market (such as a liquidity crisis) might consider investing in MORT around these levels.
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.