RWR ETF: Sustainable Yield, Steady Returns In The Long Run

~ by Snehasish Chaudhuri, MBA (Finance).

SPDR Dow Jones REIT ETF (NYSEARCA:RWR) is an exchange-traded fund (“ETF”) that invests in various types of real estate investment trusts (“REITs”) in the U.S. equity markets. RWR is currently trading at $92.6, an 18.5 percent fall from a year ago. It has an assets under management (“AUM”) of $1.6 billion. Expense ratio of this fund is 0.25 percent, which is reasonable for a passive fund. It pays a quarterly dividend and has generated an annual average total return of 10.35 percent between 2016 and 2021. RWR replicates the composition of the Dow Jones U.S. Select REIT Index and provides investors access to all U.S. real estate asset classes in a single fund.

RWR’s top holdings have generated mixed results. One half of its portfolio, that has been invested in equities of industrial REITs, healthcare REITs, data center REITs, and self storage REITs, has performed well both in the immediate short run, and over the long run.

RWR Benchmarks Dow Jones U.S. Select REIT Index, Generates Steady Yield

SPDR Dow Jones REIT ETF was formed in April 2001 by State Street Global Advisors, Inc., and is managed by SSGA Funds Management, Inc. It is a passive fund that replicates the composition of the Dow Jones U.S. Select REIT Index using representative sampling technique. This index provides a measure of REITs that serve as proxies on behalf of a direct investment in real estate projects. Dow Jones U.S. Select REIT Index is a subset of the Dow Jones U.S. Select Real Estate Securities Index, that tracks the performances of both REITs and real estate operating companies (REOCs) traded in the U.S.

In an earlier coverage in March 2022, I mentioned that due to RWR’s diversified investments all over the real estate sector, and overall economic growth, its portfolio is poised to generate a strong return in the coming years. I also found that all the technical indicators point toward an upward movement of RWR’s price in the short run. Besides the price growth, this REIT ETF has generated steady and decent yield. I also emphasized on the fact that, irrespective of sluggish demand at that point, the demand for real estate properties is not going to substantially decrease in the coming years. As a long-term investor having high hopes in the real estate sector, I was quite optimistic about this fund. One year hence, the scenario did not change much. RWR still generates a yield of 3.6 percent, and it seems to sustain this yield.

Composition and Performance of SPDR Dow Jones REIT ETF’s Portfolio

Half of RWR’s portfolio is invested in the equities of industrial REITs, healthcare REITs, data center REITs and self storage REITs. I have always opined that the current market scenario suits this type of REITs. Covid-19 pandemic and Russia’s invasion of Ukraine enhanced the demand for healthcare facilities, storage facilities and industrial infrastructure. The supply-chain disruption has helped these types of REITs to increase their margins and have a higher capacity utilization. On the other hand, office REITs, retail REITs, hotel REITs and residential REITs faced the brunt of ongoing macroeconomic situation, i.e. high inflation, low growth, and bearish markets. Interestingly these REITs account for the remaining half of RWR’s portfolio.

Top 10 holdings of SPDR Dow Jones REIT ETF in these well-performing four sectors included Prologis, Inc. (PLD), Equinix, Inc. (EQIX), Public Storage (PSA), Welltower Inc. (WELL), Digital Realty Trust, Inc. (DLR), Extra Space Storage Inc. (EXR), Ventas, Inc. (VTR), W. P. Carey Inc. (WPC), Healthpeak Properties, Inc. (PEAK), and Rexford Industrial Realty, Inc. (REXR). Stock market performance of all these stocks were impressive both during the immediate short run, as well as over the long run. During the past three months, all these stocks barring PSA and EXR grew in excess of 10.5 percent. RWR also registered a price growth of 10.48 percent. During the past five years, barring DLR, VTR and PEAK, all other stocks grew in excess of 25 percent. RWR grew by a little over 4 percent during the same period.

Top 15 holdings of SPDR Dow Jones REIT ETF in office REITs, retail REITs, hotel REITs and residential REITs included Realty Income Corp (O), Simon Property Group Inc (SPG), AvalonBay Communities Inc (AVB), Alexandria Real Estate Equities Inc (ARE), Equity Residential (EQR), Sun Communities Inc (SUI), Invitation Homes Inc (INVH), Mid-America Apartment Communities Inc (MAA), Essex Property Trust Inc (ESS), Kimco Realty Corp (KIM), UDR Inc (UDR), Host Hotels & Resorts Inc (HST), Camden Property Trust (CPT), Boston Properties Inc (BXP) and American Homes 4 Rent (AMH). Stock market performance of all these stocks failed to excite investors both during the immediate short run, as well as over the long run. During the past three months, all these stocks, barring SPG, SUI, R and O, registered a price growth less than 10.5 percent. On the other hand, during the past five years, only six stocks (SUI, MAA, INVH, KIM, AMH and O) were able to grow in excess of 25 percent.

Investment Thesis

Since the covid-19 pandemic, investors have been a little skeptical about investing in the real estate sector, and REITs have underperformed other equities. However, over the long run, REITs have been equally competitive with other U.S. or International equities. RWR replicates the composition of the Dow Jones U.S. Select REIT Index and provides investors access to all US real estate asset classes in a single vehicle. RWR’s top holdings generated mixed results. One half of its portfolio, that has been invested in equities of industrial REITs, healthcare REITs, data center REITs and self-storage REITs, has performed well both in the immediate short run, and over the long run. At the same time, market returns of the other half of its portfolio have been a bit disappointing. What surprises me most is that SPDR Dow Jones REIT ETF has no significant holdings in communication infrastructure REITs, a segment that is expected to benefit from the coming 5G and communication revolution.

Long-term returns of SPDR Dow Jones REIT ETF has been satisfactory, and the yield, although ranged between 3 to 4 percent, has always been steady. I expect this fund to sustain the current level of yield over the long run, due to its deep diversification, as well as strong growth generated by half of its portfolio. I’ll stick to my early observation that the overall economic growth will only strengthen the performance of RWR. It’s true that this fund is nothing exceptional, but at the same time doesn’t disappoint its investors.

SPDR Dow Jones REIT ETF, in my view, is a fund for long-term holding, and relatively less riskier than many other equity funds. And, because the SPDR Dow Jones REIT ETF is trading at a price much lower than what it was trading a year back, I think it’s a good time to accumulate some more units. More conservative investors should at least hold on to their existing units.