Smart Beta REIT Indices: More to Come?

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The REIT (real estate investment trust) sector, like its peers, is also starting to garner the attention of smart beta index providers and investors.

The timing is good too – REITs are outperforming this year, particularly in the US, as the low interest rate environment means investors are looking for other sources of income. US REITs are also benefiting from a move by Standard & Poor’s to create a new real estate sector under its classification system – effective tomorrow (September 1).

The contractual revenue growth underpinning REITs is also ahead of the earnings growth seen in other sectors, given a sluggish economy.

The S&P US REIT Index has delivered a gross total return of 13.74% so far in 2016, while the total return of the S&P 500 benchmark is 8.05%.

At the same time that REITs are being given more prominence by the likes of Standard & Poor’s, smart beta index providers are also looking for ways to tap the REIT sector.

Smart beta indices differ from usual benchmark indices in that they are not market cap-weighted. Instead, they assign alternative weighting schemes and offer tilts towards different return drivers in order to outperform benchmarks.

Last year, the smart beta S&P 500 Equal Weight Real Estate Index was launched. The index assigns equal weightings to real estate constituents of the parent index, thereby giving a relative lift in the importance of smaller REITs while reducing the bias towards larger ones.

Other smart beta product launches include the Solactive Global SuperDividend REIT Index, which tracks the performance of high-yielding REITs around the world, as well as the Kempen (Lux) Global Property Fundamental Index Fund, which is assembled based on underlying fundamentals rather than by the size of its constituents.

Meanwhile, the PowerShares KBW Premium Yield Equity REIT Portfolio has gained 27.6% year to date, according to Quantilia data. The index is based on the KBW Nasdaq Premium Yield Equity REIT Index, which uses a dividend yield-weighting methodology and which tracks small- and mid-cap US REITs.

Given the attractiveness of REITs in the current low rate and low growth environment, as well as the surging demand for smart beta indices, it seems likely that smart beta REITs will become increasingly popular.