REITs are viewed as bond surrogates. The value of bonds and similar income investments frequently de...
Schwab U.S. REIT: The Right Risk-to-Reward
12/13/2016 7:00 am EST
We expect rates to stabilize or even fall post Fed meeting, which should allow our new rate sensitive additions to flourish, asserts David Fabian, ETF specialist and editor of Flexible Growth & Income Report.
We continue to be impressed with the bottoming formation we are seeing in real estate investment trusts.
From a fundamental perspective, after months of underperformance, many REITs are considered to be trading at a discount to their book value.
This is similar to purchasing a CEF at a discount. We believe this opens up a unique risk and reward opportunity for our portfolio.
To prepare our portfolio for a change in investment dynamics into year end, we would like to initiate a new purchase of 5% of our total model portfolio in the Schwab U.S. Real Estate ETF (SCHH).
We were fortunate that our research pointed to removing our global real estate position alongside the rest of the rate-sensitive areas of our alternative income sleeve during the unprecedented low in longer term interest rates over the summer months.
Yet, after a significant move higher in rates, overbought conditions have now transitioned to oversold conditions. As such, many of these same assets are presenting excellent relative value characteristics when compared to common stocks.
We opted for U.S. REITs instead of reinitiating a position in global REITs due to the larger rate increase domestically, which has caused U.S. REITs to exhibit poor performance.
Furthermore, we feel the timing of the stabilization in rates coinciding with the Fed meeting could usher in a meaningful catalyst for a launch higher in REIT prices.
Lastly, the Schwab family has funds have done an excellent job of bringing together well-diversified portfolios alongside ultra-low expense ratios.
They have also attracted a large amount of trading activity and assets, which contributes to liquidity when we decide to close out this position.
Overall, we look forward to having REITs back in our portfolio since they offer a unique return profile and high-income contribution.
By David Fabian, Editor of Flexible Growth & Income Report
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