Small-cap REITs a good bet, CEO says

REAL estate stocks rebounded in the second quarter as investors jittery over escalating global trade tensions and the impact of a stronger dollar favored smaller, more domestically focused companies.

The trend began in March, when the Trump administration announced tariffs on imports of steel and aluminum. In response, traders bid up shares in small-cap stocks, driving the Russell 2000 index of smaller companies sharply higher. Small-cap real estate stocks also got a boost.

One example is IndexIQ’s US Real Estate Small Cap ETF (ROOF). The exchange-traded fund, which is aimed at tracking the overall performance of small-cap U.S. real estate companies, posted a gain of 11.2 percent in the past three months. In the same period, the S&P 500’s real estate sector gained 8 percent, while the S&P 500 rose 6.5 percent.

Small-cap REITs and other smaller-company stocks have given back some of their gains this past month. Some investors may be reconsidering the view that smaller U.S. companies might in fact fare better than larger, multinational companies in the face of tariffs or other obstacles to trade.

Sal Bruno, chief investment officer at IndexIQ, recently talked about IQ’s Real Estate Small Cap ETF and made the case for why small-cap REITs might make another comeback this year.

Q: What kind of companies make up this fund?

A: The way we’ve constructed our index is to basically take the bottom 10 percent of the U.S.-listed REITs. You don’t get excessive concentration on any individual sectors. That’s a key part of why we’ve seen the volatility be a little bit more in line with the large caps despite the fact that small caps tend to have a higher volume in general.

Q: What’s the advantage of a fund that focuses on small-cap real estate companies?

A: Small-cap REITs ETFs have outperformed large-caps both in the immediate past and a longer period as well.

Q: Real estate stocks are generally not having a good year. Interest rates have been rising, which can make REITs less attractive to dividend investors. Is this a good time to invest in real estate stocks?

A: Clearly the Fed is on a path to raise rates on the short end and has been doing so since the end of 2015, but if you look at how REITs have performed since (short-term rates) started moving up basically from zero up to about 2 percent where they’re at now, REITs have been up about 25 percent over that period.

We’re still constructive on REITs over the second half of the year. If you look at where they’re yielding right now, they’re still at about 5.5 percent on the small caps, a fairly attractive yield. We think there’s still more room to grow, but investors should be cautious.