iShares Residential Eyes Safer Asset Classes

Focus: ETFs

James Pearce Image James Pearce Chief Investment Strategist, Investing Daily

The iShares Residential Real Estate Capped ETF (REZ) seeks to track the investment results of an index composed of U.S. residential, healthcare and self-storage real estate equities, explains Jim Pearce, editor of Investing Daily's Personal Finance.

The fund consists of 40–50 holdings intended to provide exposure to the U.S. residential real estate sector by owning real estate investment trusts (REIT) that invest directly in residential properties.

When we first wrote about this fund six months ago, we noted that it had outperformed 99% of its REIT peers over the previous five years because of its concentration on residential property.

With the unemployment rate at a ten-year low and wages growing faster than inflation, residential property values are continuing their upward surge as buyers bid up home values.

This dynamic also pushes apartment rents higher, since steeper home prices combined with rising interest rates means bigger mortgage payments for new home buyers. Either way, this ETF wins since it can select which type of REIT to emphasize depending on prevailing market conditions.

A potential concern is the health care portion of the portfolio, which comprises 35% of total assets. The fund also has 17% of its assets invested in “specialized” REITs consisting primarily of self-storage facilities.

Of course, the huge “x-factor” is President Trump’s proposed income tax overhaul plan. Under the proposed version of the plan, the deduction for home mortgage interest payments would remain.

In that case, demand for residential property could escalate if mortgage interest becomes one of the few itemized deductions available.