RIET: Slim Focus On Dividend Yield Could Trigger Poor Choice (NYSEARCA:RIET)

The Hoya Capital Excessive Dividend Yield ETF (NYSEARCA:RIET) is an ETF targeted on the true property sector. It curates a portfolio of the very best yielding REITs, throughout totally different property sectors and market cap segments.

Though the RIET ETF pays a beautiful 10.0% distribution yield, I fear that its slim deal with dividend yields might trigger detrimental safety choice. Bear in mind, excessive dividend yield said otherwise is low inventory value. The ETF’s slim focus might result in a portfolio of poor performers with basic causes driving their inventory costs decrease, and dividend yields greater. I might keep away from this ETF.

Fund Overview

The Hoya Capital Excessive Dividend Yield ETF supplies publicity to a curated basket of excessive dividend yielding actual property securities. The RIET ETF tracks the Hoya Capital Excessive Dividend Yield Index (“Index”), an index designed to measure the efficiency of the 100 highest dividend-yielding actual property securities in america.

The RIET ETF is a small fund with solely $31 million in belongings and fees a 0.50% expense ratio (Determine 1).

Technique

Starting with a universe of U.S.-listed widespread and most popular inventory of actual property funding trusts (“REITs”) and actual property working firms, the index supplier first filters the universe for investability and liquidity necessities similar to $100 million minimal market cap and common day by day liquidity of $100,000. Then the universe is split into three equal-sized market cap tiers: Massive-Cap, Mid-Cap, and Small-Cap.

The index supplier then assigns every firm within the universe into one in every of 14 ‘property sectors’ together with Healthcare, Knowledge Middle, Storage, Industrial, and many others. From every property sector, the index identifies the 2 largest firms by market cap and chooses the upper dividend yielding firm for additional consideration. Out of those 14 potential candidates, the 2 with the bottom dividend yield and the 2 with the very best debt ratio are dropped, leaving ten ‘Dividend Champions’ to be included within the index.

After deciding on the ‘Dividend Champions’, the index then proceeds to type the remaining firms in every market cap tier by their dividend yield and selects the highest 10 within the Massive-Cap section, high 25 within the Mid-Cap section, and high 25 within the Small-cap section.

Lastly, of the 50 most actively traded most popular shares of REITs and actual property firms, the index contains the highest 30 by dividend yield.

Determine 2 exhibits an illustrative composition of the Hoya Capital Excessive Dividend Yield Index.

Who Is Hoya Capital?

Hoya Capital is an typically quoted analysis and advisory agency based mostly out of Connecticut with a aim of constructing actual property investing extra accessible. The agency’s analysis and commentaries have been featured within the Wall Road Journal, Bloomberg TV, CNN, Forbes, and different information providers.

Portfolio Holdings

Determine 3 exhibits the index’s high 10 holdings.

Distribution & Yield

By investing in excessive yielding REITs, the RIET ETF is ready to gather excessive dividend revenue and passes them onto unitholders on a month-to-month foundation. The RIET ETF has paid a trailing 12 month distribution of $1.01 / share or 10.0% trailing yield (Determine 4).

Returns

Though the RIET ETF pays a excessive distribution yield, there are some considerations relating to the fund, because it has misplaced 25.1% on a 1Yr foundation and 15.4% since inception (Determine 5).

Each figures have lagged the Benchmark, the Dow Jones US Actual Property Index, which tracks the efficiency of the broad REIT sector.

Focusing On Dividend Yield Could Restrict RIET To Poor Performers

The primary situation I’ve with the RIET ETF is that its safety choice course of appears to be overly targeted on the dividend yield. Whereas a excessive dividend yield is nice, particularly for income-oriented buyers, the choice standards doesn’t seem to think about the sustainability of the dividends or different basic efficiency drivers.

What might occur is that poor inventory performers, i.e. Crown Fortress (CCI) with a 1Yr value return of -30.0%, finally ends up having a big weight within the RIET ETF, as its inventory declines, driving its dividend yield greater (Determine 6).

If the RIET ETF constantly selects the very best yielding REITs (lowest inventory value relative to dividend) from its universe, the fund might find yourself with a basket of poorly performing shares.

In truth, if we have a look at the RIET ETF’s present holdings, we see the ETF presently holds many healthcare REITs that collectively add as much as 10.4% of the portfolio (Determine 7).

Healthcare REITs have been below basic stress resulting from tenant operator points amid labor shortages and a discount of presidency help submit pandemic. This has triggered missed lease funds and lease renegotiations, and have pushed the inventory value of healthcare REITs decrease, and thus their dividend yields greater.

Small Funds Could Have Poor Liquidity

One other situation with the RIET ETF is that with solely $31 million in belongings, liquidity might be fairly skinny for the ETF. For instance, the RIET has a $0.04 bid/ask unfold and trades on common on 25-30k shares a day or ~$250k-$300k (Determine 8).

Traders seeking to purchase or promote might undergo from vital slippage when transacting in small funds just like the RIET ETF.

Conclusion

Whereas the RIET ETF pays a beautiful 10.0% trailing distribution yield, I fear that its focus solely on the dividend yield issue might trigger detrimental safety choice bias, i.e. it solely selects poor inventory performers with basic causes driving their dividend yields greater (and inventory costs decrease). I might keep away from this ETF.