Thursday, October 7, 2010

The REZ Paradox

I had a brief exchange with Andrew Butter on Seeking Alpha that I thought might warrant a broader audience here.

Specifically, Andrew asked about the FTSE NAREIT Residential Plus Capped Index Fund (REZ) and wondered if apartments were behind the relative outperformance of this real estate ETF.
My reply noted that the three largest components of REZ are:

  1. Apartments – 47%
  2. Health care – 37%
  3. Self storage – 13%
It comes as no surprise to anyone that recent economic forces have driven a number of strong housing market trends, including a decrease in home ownership and an increase in the demand for apartments. A story by Dawn Wotapka of the Wall Street Journal yesterday confirmed that the apartment market continues to rally.

Of course, as homeowners migrate to apartments, they are typically downsizing in terms of square feet of living space, which is also increasing the demand for self-storage facilities. When you add together the 47% of REZ that is accounted for by apartments and 13% that is attributed to self storage, the result of the move from homes to apartments is a paradox of sorts in which the REZ ETF as currently structured should perform particularly well in a deteriorating residential real estate market.

Seen in this light, there is little wonder that REZ has outperformed its counterparts, RTL and FIO, which are focused primarily on shopping centers and offices, respectively.

Finally, on a housekeeping note, I am making a concerted effort to keep up with my Seeking Alpha private mailbox and comments, just as I do with private emails and comments on the blog. At the moment I am a little behind, but if you have some outstanding questions and comments, I expect to get caught up in the next day or two.

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