With interest rates shrinking on fixed-income vehicles, some risk-tolerant investors are turning to high-yielding exchange-traded funds (ETFs). A popular choice these days is Invesco KBW Premium Yield Equity REIT ETF (KBWY +0.62%).
Packing one of the highest distributions among non-mortgage-based real estate ETFs, is Invesco KBW Premium Yield Equity ETF a good place for your next investment? Let's take a closer look at several things that you may want to know before putting money to work in this ETF.
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1. The yield is high for a reason
Invesco KBW Premium Yield Equity draws a crowd for its payouts. It has paid out a little over $1.51 a share in monthly -- yes, monthly -- distributions over the past year, translating into a juicy 9.1% yield based on Friday's close of $16.61. Even if you go with its more forward-telling SEC 30-day yield of 7.72%, it's one of the highest-yielding non-mortgage real estate REITs.
The reason for the higher-than-average yield isn't the ETF's reasonably low 0.35% net expense ratio. Its peers offer annual expense ratios as low as 0.07%. Invesco's entry in this niche simply focuses on some of the smaller, eclectic, and in most cases riskier REITs as its top investments. Let's dive into that next.
NASDAQ: KBWY
Key Data Points
2. The fund's top holdings might surprise you
Morningstar rates the ETF's risk score at an aggressive 99 out of 100. Unlike most real estate ETFs that focus on the largest players in the commercial or residential real estate markets, which offer lower yields, this fund aims to mirror the KBW Nasdaq Premium Yield Equity REIT Index. The index prioritizes small- and mid-cap equity REITs, often packing high yields to offset the higher risks.
The ETF's largest holding is Innovative Industrial Properties (IIPR 0.04%). It specializes in leasing facilities to experienced, state-licensed operators in the regulated cannabis industry. Unfortunately for investors, there have been some notable tenant defaults and dividend cuts. The REIT itself has shed a quarter of its value over the past year and 73% over the past five years. It has managed to grow its distributions in recent years, but today's 15% yield may not be sustainable after its business declined in back-to-back years.
The second largest holding is Community Healthcare Trust (CHCT +0.06%), which leases space to hospitals, doctors, and other healthcare providers. This has been a fickle market in recent years. The REIT's 11.1% yield is impressive, but what isn't so cool is how its profitability has been stung by rising interest expense payments. Community Healthcare Trust has fallen 14% over the past year and 64% over the past five years.
3. The ETF's performance has been disappointing
Invesco KBW Premium Yield Equity REIT ETF will turn heads with its high yield and monthly distributions, but it has burned many of those investors. The fund received Morningstar's lowest one-star rating over the past three-, five-, and 10-year periods. It has bounced back as one of this young year's biggest gainers, but can it keep that bullish momentum going?
The shares are down 6% from where they were a year ago, falling 21% over the past five years. The quality of its top holdings could be less problematic. However, there will be times when its eclectic collection of positions lead the market. It's happening now. Sustainability will be the rub.
