USRT: Wait For Better Momentum And Relative Strength

Looking for a cheap area of the market? Along with Energy and Financials, the Real Estate sector, including many Real Estate Investment Trusts (REITs), sports a below-average earnings multiple, according to data from FactSet. With a weaker dividend payout compared to years ago and poor price action, however, I have a hold rating on the iShares Core U.S. REIT ETF (NYSEARCA:USRT).

Real Estate Among the Cheapest Sectors

According to the issuer, USRT seeks to track the performance of an index comprised of US real estate equities. The fund offers investors several advantages, per iShares. It provides a cost-effective means of accessing a diversified portfolio of domestic Real Estate Investment Trusts (REITs). Additionally, USRT is designed for investors seeking a balance between income generation and capital growth by offering broad exposure to various niches within the real estate sector. It seeks to track the performance of the FTSE Nareit Equity REITs Index, by using a representative sampling technique.

USRT is a large ETF with nearly $2.0 billion in assets under management and it pays a trailing 12-month dividend yield of 3.51% as of September 19, 2023. With a 30-day median bid/ask spread of just four basis points and average daily volume of about 170,000 shares, liquidity is decent with the fund while its annual expense ratio is very low at just 0.08%. Momentum has been extremely soft this year despite what appears to be a rebound in the US housing market. Higher interest rates have pressured REITs more than most other types of equities. USRT has been underperforming the S&P 500 since its 2007 inception, and that spans many interest rate environments.

USRT vs SPY: Massive Long-Term Underperformance

Digging into the portfolio, USRT features an interesting mix of stocks. Notice in the Morningstar Style Box below that half the allocation is considered mid-cap blend, but there is also a material exposure to large-cap growth. Still, there are ample investments in small caps, though not much is allocated to value.

The portfolio holds 139 securities, and the top 10 holdings comprise 47% of the fund, so it is somewhat concentrated – a key risk for investors to consider. With total dividends peaking in 2018, per Seeking Alpha, recent income growth has been lackluster and the quality of stocks the fund owns is not all that high, so there is added cyclical risk here.

USRT: Portfolio & Factor Profiles

Lower Dividends Today Versus History

To the fund’s credit, it is diversified across REIT industries, and it is an exceptionally low cost to own ETF, and its price-to-book ratio is considerably less than that of the broader market.

USRT: Broad Industry Exposure, Low Annual Cost

Seasonally, REITs tend to struggle in late September through the first few sessions of October, but the final quarter of the year often offers investors an opportunity to get long this space. USRT tends to rally through December before pulling back in Q1, according to data from Equity Clock.

USRT: Bearish Short-Run Seasonal Trends, Stronger Late-Year Stretch

The Technical Take

With a decent valuation, poor momentum, and diversified industry exposure, the chart is not encouraging. Notice in the graph below that shares have been consolidating in a symmetrical triangle for the better part of the past year. I see support at an uptrend line off the October 2022 nadir, currently just above $48 while resistance could come into play in the $53 to $54 range.

Also take a look at the high amount of volume by price in the $46 to $52 zone – with the ETF stuck right in the middle of that area, both the bulls and bears have work to do in order to break the trend. If we see a bullish breakout above $54, though, then a measured move price objective to about $69 would trigger based on the $15 height of the triangle. A breakdown may portend a move to the 2022 multi-year low around $45. With a flat 200-day moving average, downside momentum has eased, but there are few signs of a solid upside reversal.

Overall, the chart is lackluster and USRT has been a serial underperformer over many years.

USRT: Consolidation After A Steep 2022 Decline

The Bottom Line

I like the valuation on REITs, but I would like to see improved momentum before issuing a buy rating on this low-cost sector ETF.