The Invesco KBW Premium Yield Equity REIT ETF (KBWY 0.89%) aims to provide investors with an above-average income yield. The exchange-traded fund's (ETF) strategy is to invest in smaller real estate investment trusts (REITs). It weights these REITs by yield, which enables it to generate lots of dividend income to distribute to investors.
Here's a look at how this REIT ETF investment can beat the market.
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A closer look at this REIT ETF
The Invesco KBW Premium Yield Equity REIT ETF currently holds more than 30 REITs. Its five largest holdings are:
|
REIT |
Allocation in KBYW |
Market cap |
Dividend yield |
|---|---|---|---|
|
Innovative Industrial Properties |
5.77% |
$1.3 billion |
16.4% |
|
Community Healthcare Trust |
5.59% |
$486.6 million |
11.2% |
|
Global Net Lease |
4.40% |
$2.1 billion |
7.9% |
|
Gladstone Commercial |
4.40% |
$665.7 million |
9.8% |
|
Alexandria Real Estate Equities |
4.01% |
$9.2 billion |
8.8% |
Data source: Invesco Premium Yield Equity REIT ETF and Google Finance.
These REITs currently have yields more than double the sector's average of around 4%. They're also a lot smaller than the largest real estate stocks by market cap, some of which are worth over $100 billion.
The fund's focus on higher-yielding REITs has enabled it to offer investors a lucrative income stream. Over the last 12 months, the fund's distributions have yielded more than 9%.
NASDAQ: KBWY
Key Data Points
However, while the fund offers a high income yield, its total return (dividends plus price appreciation) has been severely lacking. Its total return over the past year is -0.4%, while its average annual total return since inception (December 2010) is 4%. It has underperformed the S&P 500 and the REIT sector as a whole.
A look at what could turn this REIT ETF around
REITs are highly sensitive to interest rates, especially higher-yielding REITs. Higher interest rates increase borrowing costs, making it more expensive for REITs to refinance debt and to fund expansion initiatives such as development projects and acquisitions. Smaller REITs tend to have even higher borrowing costs than their larger rivals because they typically have lower credit ratings. Additionally, higher rates make lower-risk fixed-income investments, such as bonds, more attractive to income-focused investors. As a result, the value of higher-risk income investments, such as commercial real estate, falls, which increases their income yield to compensate for their higher risk profile.
Whereas higher rates are a headwind for small, lower-yielding REITs, lower rates are a significant tailwind. It would lower borrowing costs and boost the value of their portfolios. As a result, a meaningful decline in interest rates would likely enable the Invesco KBW Premium Yield Equity REIT ETF to beat the market.
Lower rates would benefit this income-focused investment
Higher interest rates over the past several years have weighed on the performance of the Invesco KBW Premium Yield Equity REIT ETF. However, if rates start to fall, this headwind could shift into a major tailwind.
