RWR: Long-Term Growth Trend Is Positive (NYSEARCA:RWR)

Supatman Investment Thesis SPDR Dow Jones REIT ETF (NYSEARCA:RWR) invests in a portfolio of U.S. REITs. The fund tracks the Dow Jones U.S. Select REIT Index and includes about 100 REITs in its portfolio. The fund has an expense ratio of 0.25%. This is high relative to many other REIT ETFs. For example, iShares Core U.S. REIT ETF (USRT) only charges an expense ratio of 0.08%. RWR’s assets under management of about $1.7 billion are also less than USRT’s $2.8 billion. RWR has a distribution yield of about 3.4%. The fund has generated a very strong total return of 631.8% since its inception in 2001. RWR has a balanced sector breakdown, with no single sector represents over 20% of the total portfolio. Industrial and data centers REITs in RWR’s portfolio will continue to benefit from the secular growth trend in e-commerce, and data computing caused by surging demand in artificial intelligence. Residential REITs will also benefit from the current low housing starts and historical low housing inventory level. Although macroeconomic uncertainties exist, RWR appears to be a good fund to own for investors willing to look past near-term uncertainties. YCharts Fund Analysis Diversified sector allocation Below is a chart that shows RWR’s sector breakdown. As can be seen from the chart below, no sectors represent more than 20% of RWR’s total portfolio. Therefore, concentration risk is low. Its largest sector is the retail sector, which represents about 19.9% of the total portfolio. This is followed by residential’s 18.7% and industrial’s 15.8%. Healthcare REITs and data center REITs represent about 13.1% and 11.4%, respectively. SPDR RWR’s exposure to economic sensitive sector is not high RWR’s exposure to economic sensitive sectors is not high. Economic sensitive sectors such as retail, hotels and office REITs only represent about 28.9% of RWR’s total portfolio. Retail REITS continues to face the challenge of rising e-commerce trend. Office REITs face the challenge of higher vacancy ratio due to many companies now adopting a combination of work-from-home and work-at-office policy. Hotel REITs face the challenge of the rise of Airbnb. Fortunately, these 3 sectors represent less than 30% of RWR’s total portfolio. RWR has good exposure to higher growth sectors On the other hand, RWR has a good exposure to sectors that are riding on many important secular trends. Industrial REITs, which represent about 15.8% of the total portfolio, are riding on the wave of the continual emergence of e-commerce. As can be seen from the chart below, e-commerce as a percent of total retail sales is on a rising trend and is expected to reach nearly 25% by the end of this year. Therefore, we expect demand for industrial warehouse spaces to remain very strong. CBRE Research Data center REITs, which represent about 11.4% of RWR’s total portfolio, are riding on the wave of cloud computing and, more importantly, the demand for artificial intelligence computing. According to Statista, revenue in the data center market is expected to grow by an annual growth rate of 8.5% between 2024 and 2029 reaching a market volume of $624.1 billion in 2029 from $416.1 billion in 2024. Therefore, data center REITs should benefit considerably. Statista Residential REITs, which represent about 18.7% of RWR’s total portfolio, will naturally benefit from a steady increase in population in the United States. Not only that, but we also note that housing construction is now at a cyclical low since the start of the pandemic in 2020. This can be seen from the chart below. Trading Economics Besides low housing starts, housing inventory in the U.S. is also very low right now. As can be seen from the chart below, the current housing inventory is the lowest we have seen at least in the past 4 decades. Therefore, residential REITs should have room to increase the rental rate in the future due to lower inventory. Together, industrial, data centers, and residential REITs represent nearly 46% of RWR’s total portfolio. Trading Economics Beware of the following risks: Although we have pointed out RWR’s favorable trend, we think investors of RWR should keep in mind the following two risks: 1. RWR has higher downside risk than the broader stock market Many people have the impression that real estate markets are less volatile than stocks. This may be true for most real estate markets as people do not buy and sell real estates frequently. Hence, price volatility may not be felt quickly. In contrast, investors of stocks often trade much more frequently, sometimes even within days. Hence, stock markets are much more volatile. However, we should keep in mind that REITs trade in the stock exchange just like other stocks. Therefore, market optimism and fears can cause REIT funds to move up and down quickly, just like any other stocks. In reality, many REITs have much higher volatility than the broader market. In fact, RWR has an average beta of 1.17 in the past 5 years relative to the S&P 500 index’s beta of 1. For reader’s information, beta ratio measures a stock’s volatility. If it is higher than 1, it is more volatile than the broader market and vice versa. Below is a chart that compares RWR’s fund price decline from the high to the S&P 500 index. As can be seen from the chart below, RWR has declined much harder than the S&P 500 index in past recessions and stock market corrections. In the Great Recession of 2008/2009, RWR lost about 75% of its fund value. In contrast, the S&P 500 index declined by about 55%. In the recession caused by COVID-19 in 2020, RWR also declined more than the S&P 500 index. This is also the case in broader stock market correction in 2022 as RWR declined by 35% whereas the S&P 500 index only declined by about 25%. Therefore, investors of RWR should be aware of the significant downside risk of RWR in economic recessions. YCharts 2. Economic recession may not be too far away A period of elevated interest rate environment appears to start causing some damages to the economy. As we have seen from the U.S. unemployment chart below, the unemployment rate is now on a rising trend. The current unemployment rate of 4.3% in July 2024 is much higher than the low of 3.4% reached in early 2023. This rise in unemployment rate appears to be accelerating and is worrisome. Federal Reserve Bank of St. Louis Besides the rising unemployment rate, we noted that the 10-year minus 2-year treasury rate has now turned from negative to positive. This is a forward economic indicator that tells us that foretells whether the economy will head into a recession or not. This forward indicator has been accurate to predicting recessions in the past. As can be seen from the chart below, 10-year minus 2-year treasury rate has inverted (turned negative) and turned positive again in 1999-2000, 2006~2007, and briefly in 2019. Since the recession in 2019 is caused by COVID-19, we will ignore the reading in 2019. As can be seen from the chart, not long after the readings turned positive, recessions (gray area in the chart) will occur. Since the 10-year minus 2-year treasury rate has now turned positive in 2024, an economic recession may not be too far away. As we have discussed earlier in the article, RWR can decline more than the S&P 500 index in past economic recessions. Federal Reserve Bank of St. Louis Investor Takeaway RWR has an attractive dividend yield of 3.4%. We like RWR’s exposure to many sectors that will benefit from long-term secular growth trends. Its exposure to economic sensitive sectors is limited. However, investors should keep in mind of the downside risk RWR can face in an economic recession. Overall, this is a good EFT for income investors with a long-term investment horizon willing to look past the possible economic recession in the near-term. Additional Disclosure: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.

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