SET Portfolio Update March 2017

| March 21, 2017

Sector Spotlight:

The Recent Ride For REITs

 We recommended the Vanguard REIT ETF (VNQ) in December at $81.13.  Today, it closed at $82.01.

Behind the actual price of the ETF are two numbers to keep in mind.

First is the yield, which is now 4.66%.

Second is the actual valuation of the ETF.

In a market full of high priced stocks, VNQ is a bargain.  Historically, when you compare the price of the REIT to the underlying value of the assets held, there is a premium of roughly 3%.

Right now, the overall REIT market sells at a discount of roughly 7%.  It’s one of the few sectors of the market where investors can pay below market value for quality assets.

But as we’ve noted in the past, all real estate assets are not created equal.  There are times when apartments and residential real estate perform well while hotels and resorts are skidding.  This is why we recommended Vanguard’s REIT ETF which tracks REITs across multiple segments.

During the month of February, retail shopping REITs performed the worst and storage REITs performed best.  No surprise, since Sears and Macys says they’ll be shuttering 200+ department stores.

The dimming prospects for department stores are nothing new.  What is surprising is the relatively strong performance of malls.

It helped that Simon Property Group (SPG) and GGP (GGP), formerly known as General Growth Properties, both reported solid demand for Class A retail space.

“We continue to see strong demand for space across our portfolio. Our malls and premium outlets’ occupancy ended the year at 96.8%… near historic high levels,” Simon Property CEO David Simon told analysts last month.

Simon is the largest position tracked by the ETF.

Other real estate categories are reporting similar strength, so why isn’t the price of the Vanguard REIT ETF soaring?

REITs often march to a different drummer than the overall market.  They are different financial instruments than stocks, but their prices are prone to many of the same investor sentiments that influence stocks.  As we’ve noted in the past, there is nothing rational about investor sentiment.  We suspect that for the past few months, worries about two things have been pressuring REITs.

One is the concern over rising interest rates.  This is not a totally irrational concern, because sometimes, if future cash flows are forecast to be stable, rising rates have the potential to drag down asset values, which lowers the value of the REIT.

We believe this concern has been inflated.  If other stock prices were more reasonable, the decline in value of REITs would make sense.  But stock prices are high, so we feel the decline in REITS over the past month has been amplified.  It’s due for a correction.

Vanguard REIT ETF

The other worry is the future of the mall.  We don’t see the mall vanishing, but we do see it changing, and we see smart management at the major mall REITs ahead of the curve on this retail shift.

Meantime, investors in VNQ are collecting a handsome yield, and own a diversified portfolio of desirable real estate assets.

We’re happy to hold, and look for strong performance in the months ahead. 


Portfolio Update 

. . . . iShares MSCI Switzerland Capped ETF (EWL) – HOLD 

We invested in this ETF for some peace and quiet.  Our goal was to find a safe harbor with secure global companies and that’s what we’ve found.  Over the past two weeks, little has changed. 

. . . . Vanguard Mid-Cap Index Fund Investor Shares (VIMSX) – HOLD  

Today’s market performance underscores our decision to invest in mid-cap stocks.  Shortly before the market close, the broad market was down more than 1%, and mid-caps were down less than a third as much.  In the turbulence we expect ahead, mid-caps aren’t a bad place to be. 

. . . .  SPDR S&P Pharmaceuticals ETF (XPH) – BUY 

The ETF started off the month at $42.18.  Prices continue to be shaped more by health policy rumblings in Washington than the companies’ revenue reports.  We expect a long stretch of ups and down, and we’re happy to ride the storm out. 

. . . . Vanguard REIT ETF (VNQ) – BUY 

As reported in our Sector Spotlight, we’re happy told hold and collect the current 4.66% yield. 

. . . . PowerShares Dividend Achievers (PFM) – HOLD 

The past month’s performance has been ups, downs, and trading within a narrow range, relatively little change.  The yield is 2.26%. 

. . . . First Trust ISE Global Engineering & Construction (FLM) – HOLD 

There’s still a strong expectation, based on the prices of the stocks this ETF tracks, that White House policies to fund major infrastructure projects will be flowing sooner rather than later.  YTD the ETF is up 3.68%.

. . . . Vanguard High Dividend Yield ETF (VYM) – HOLD

We’re seeing a pattern over the past month similar to the Powershares Dividend Achievers ETF. Current yield is 2.78%.

. . . . Utilities Select Sector SPDR (XLU) – HOLD

Following a strong February surge, March has been mixed for utilities.  But there’s no change in our sentiment.  We’re happy to hold and collect the dividends, which are now at 3.96%.

Action to Take

  • Move SPDR S&P Pharmaceuticals ETF (XPH) from HOLD to BUY
  • Move Vanguard REIT ETF (VNQ) from HOLD to BUY

Category: SET Portfolio Updates

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