ROOF: A High-Yielding, Small-AUM ETF Investing In Most Sought-After REITs (NYSEARCA:ROOF)

~ by Snehasish Chaudhuri, MBA (Finance).

IQ U.S. Real Estate Small Cap ETF (NYSEARCA:ROOF) is an exchange-traded fund (“ETF”) launched by New York Life Investment Management LLC., and is managed by IndexIQ Advisors LLC. The fund fully replicates the composition of the IQ CBRE NextGen Real Estate Index. This index is a rules-based, modified capitalization weighted, float adjusted index, that is designed to provide exposure to real estate sectors and companies. The fund invests primarily in real estate investment trusts (“REITs”) that are expected to benefit from large trends affecting property sectors of the global economy. The fund is currently trading at $46.22, at a marginal discount to its net assets value (NAV’) of 0.04 percent. It has an expense ratio of 0.6 percent, a bit high primarily because of its low asset base. Annual turnover ratio of its portfolio is 31 percent.

ROOF has invested in the right sector of REITs and delivered consistent yields

IQ U.S. Real Estate Small Cap ETF was launched almost 12 years back in June, 2011. The Fund has a targeted exposure to real estate securities with potential to benefit from four long-term trends: Digital Transformation, eCommerce Revolution, financial inclusion & Generational Change. CBRE Investment Management, which advises IndexIQ Advisors LLC in its index Construction, has managed real estate portfolios since 1984 and maintains the longest track record in the industry. The fund has paid quarterly dividends for the past 12 years, and generated an annual average yield of 5.2 percent over the past 10 years. Trailing twelve months yield is 4.1 percent, and annual yield mostly ranged between 4 to 6 percent. Based on such consistent yield, ROOF recorded a total return of 8.3 percent between 2016 and 2021.

REITs are regarded as safe investments with respect to impacts of trade wars, as fallout from the trade war is unlikely to have a major impact on this sector. Despite being a global fund, it has invested 77.5 percent of its assets in the U.S. ROOF invested almost 80 percent of its assets in Industrial REITs, Infrastructure REITs, Data Center REITs, and Healthcare REITs. While analyzing funds (ETFs, CEFs, etc.), I have repeatedly emphasized that four sectors – industrial, financial, healthcare, and information & communication technology (ICT) – have the maximum growth potential in the coming decade. Following the same logic, real estate investments in these four sectors will also benefit the most. So, I expect Industrial REITs, Infrastructure REITs, Mortgage REITs, Data Center REITs, and Healthcare REITs to have huge growth potential.

Despite an AUM of just $30 million, ROOF’s portfolio consist of well-known REITs

Moreover, the small-cap REITs are much better known than small-cap firms in other sectors. AFC Gamma, Inc. (AFCG), CorEnergy Infrastructure Trust, Inc. (CORR), Community Healthcare Trust Incorporated (CHCT), Diversified Healthcare Trust (DHC), Global Medical REIT Inc. (GMRE), Centerspace (CSR), Cyxtera Technologies, Inc. (CYXT), INDUS Realty Trust, Inc. (INDT), NewLake Capital Partners, Inc. (OTCQX:NLCP), One Liberty Properties, Inc. (OLP), Plymouth Industrial REIT, Inc. (PLYM), Presidio Property Trust, Inc. (SQFT), Global Self Storage (SELF), Urban Logistics REIT plc (OTCPK:PCILF), Xior Student Housing NV (OTCPK:XIORF), Universal Health Realty Income Trust (UHT), Power REIT (PW), Uniti Group Inc. (UNIT), UMH Properties, Inc. (UMH) – all these well-known REITs have market capitalization of less than $1 billion. These small-cap REITs have put together an impressive track record in recent years relative to their large-cap counterparts, and may also have appeal as acquisition targets.

REIT funds have the option of getting a decent stake in these REITs despite having such a small asset base. IQ CBRE NextGen Real Estate ETF invested in half of those above small-cap REITs. In addition, these ETFs can also acquire small percentages of large-cap or mid-cap ETFs. Market understands this and has poured money into REIT ETFs. Quite simply, investors will be attracted more towards funds that invest in well-known U.S. REITs like American Tower Corporation (AMT), Prologis, Inc. (PLD), Equinix, Inc. (EQIX), Crown Castle Inc. (CCI), SBA Communications Corporation (SBAC), Keppel REIT (OTC:KREVF), Welltower Inc. (WELL), SEGRO plc (OTCPK:SEGXF), Alexandria Real Estate Equities, Inc. (ARE), Rexford Industrial Realty, Inc. (REXR), AvalonBay Communities, Inc. (AVB), etc., rather than by some micro-cap stocks that people are unheard of.

ROOF has invested 55 percent of its assets in 11 of these large-cap REITs, and 11 other small-cap REITs. Another 15 percent of its assets are invested in another 10 stocks (in relatively small proportion) – Equity Residential (EQR), Americold Realty Trust, Inc. (COLD), Ventas, Inc. (VTR), Invitation Homes Inc. (INVH), Mid-America Apartment Communities, Inc. (MAA), Sun Communities, Inc. (SUI), EastGroup Properties, Inc. (EGP), First Industrial Realty Trust, Inc. (FR), STAG Industrial, Inc. (STAG), Healthpeak Properties, Inc. (PEAK) – which are also well-established REITs. Being a small-cap fund with an asset under management (AUM) of less than $30 million, making a portfolio consisting of all these stocks, sounds really impressive. I don’t think the same is possible in any other sector such as financial, healthcare, energy, consumer cyclical, etc.

ROOF’s portfolio generates strong, sustainable yield despite its low AUM

I find IQ U.S. Real Estate Small Cap ETF to be lucrative according to my “7 Factor Model for Evaluating Global Equity Funds.” It qualifies for the minimum requirements with respect to stock price, generated strong yield over the years, and has been able to successfully achieve its objective of generating stable current income. However, this REIT ETF has a very low AUM. I generally don’t cover funds with an AUM lower than $200 million. But I covered this fund, mainly because, despite an AUM of less than $30 million, ROOF’s portfolio consists of well-known and established REITs which otherwise has been sought-after by investors interested in real estate companies. Not-to-mention that, these REITs are the leading players in their respective segments.

Significant proportion of ROOF’s assets are invested in Industrial REITs, Infrastructure REITs, Data Center REITs, and Healthcare REITs – the segments I expect to have strong growth potential in the coming decade. It invests primarily in U.S. markets. The fund has paid quarterly dividends since its inception, and generated an above-average yield over the past 10 years. ROOF’s annual average total return, although not in double-digits, is still good enough. And, due to investing in established and sought-after REITs in the right segment of REITs, I believe this fund will be able to sustain its current level of yield.

Mostly, individual REITs don’t generally generate strong yields, so income-seeking investors interested in the real estate sector should find IQ U.S. Real Estate Small Cap ETF attractive. Thus, despite having such a small asset base, I would argue that investors must not overlook this ROOF fund.