Is Real Estate ETF a Stealth Technology Trade?

This Real Estate Fund Looks More Like a Stealth Technology Trade

Believe it or not, real-estate investment trusts (REITs) are leading the market this month.

The SPDR Real Estate ETF (XLRE) is up 1.8 percent so far in May. That contrasts with a 2.4 percent drop for the broader S&P 500 over the same period.

Even more surprising, two major technology trends are driving the gains: wireless communications and cloud-computing. That’s helping rescue a corner of the market that once looked threatened by shopping-mall closures across the U.S.

For example, XLRE’s biggest holding is American Tower (AMT), owns 170,000 cell-phone towers in places like the U.S., Mexico and India. Together with two smaller rivals, Crown Castle (CCI) and SBA Communications (SBAC), wireless towers account for 22 percent of the fund’s assets.

SPDR Real Estate ETF (XLRE) with 50- and 200-day moving averages.

5G Networks Coming

The tower story has grown along with the spread of smart phones and streaming video in recent years. But that could be small potatoes compared with the advent of 5G networks over the next decade. Companies don’t seem seem to be issuing hard revenue estimates yet, but industry experts see the new technology as a major growth driver for wireless towers. That’s especially true because most of the suitable locations in big population centers have already been gobbled up.

Data centers are the other hot technology trend in the real-estate sector. Most investors know about rise of cloud computing as corporations and governments migrate old computer systems to third-party servers.

But a lot of investors might not consider the handful of REITs whose buildings house those computer arrays. Equinix (EQIX) and Digital Realty Trust (DLR) are the two in XLRE, accounting for another 8 percent of the funds assets. Other less-known firms include CyrusOne (CONE), CoreSite Realty (COR) and QTS Realty Trust (QTS).

Equinix (EQIX) chart. Notice "golden cross" of 50-day MA rising above 200-day MA.
Equinix (EQIX) chart. Notice “golden cross” of 50-day MA rising above 200-day MA.

XLRE’s Main Holdings

Here’s a breakdown of the five largest holdings in XLRE:

  1. American Tower (AMT): The world’s biggest wireless-tower owner.
  2. Simon Property Group (SPG): The largest U.S. retail REIT, owning more than 200 million square feet of shopping malls and outlet stores.
  3. Crown Castle (CCI): The wireless-tower company has more than 40,000 locations across the U.S.
  4. Prologis (PLD): The owner of warehouses and shipping centers is also a technology play, benefiting from the sharp rise of e-commerce.
  5. Equinix (EQIX): The owner of cloud-computing facilities continues to open new locations from Warsaw to Singapore.

Aside from the up-and-coming technology REITs, members of the sector also own apartment buildings, health-care facilities and public-storage units.

The Impact of Interest Rates

Investors interested in REITs should also know that they’re often sensitive to interest rates. Lower rates tend to be positive because the market values REITs for their dividends. That’s been the case recently, making XLRE on of only two major sector funds to hit a new all-time high yesterday. The SPDR Consumer Staples ETF (XLP) was the other.

On the flip side, REITs are less economically sensitive than other sectors like industrials or semiconductors. That can make them less attractive to investors when growth accelerates.

In conclusion, REITs are relatively new as a standalone sector. A lot of investors may ignore them, but they’ve become an increasingly important part of both the stock market and the broader economy. Hopefully this article helped to you to learn some of the big names and trends at play.

This post is part of our regular “ETF of the week” series. It focuses on exchange-traded funds with interesting news or price changes.

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David Russell is Global Head of Market Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.