Real estate investment trusts, or REITS, will soon become the 11th sector of the S&P 500 (^GSPC) . But you can invest in real estate using a REIT ETF now.
To simplify it, a REIT is a company that owns or finances real estate properties in return for rental income and capital gains on sales of properties in the portfolio. This taxable income is paid to shareholders in the form of dividends.
Two of the largest REITs are Simon Property (SPG) - Get Report and Public Storage (PSA) - Get Report . These are the top two components of the SPDR Dow Jones REIT ETF (RWR) - Get Report , which is an exchange-traded fund consisting of 99 publicly traded REITs.
Simon Property invests in real estate around the world, concentrating on shopping malls, outlets and community centers. The REIT reported earnings on July 27 and beat analysts' earnings-per-share estimates for the sixth consecutive quarter. Simon Property traded to an all-time intraday high of $229.10 on July 29, up 17.1% year to date and up 29.2% from its 2016 low of $176.11, set on Feb. 9. This REIT is the largest component of the ETF, with a weighting of 10.16%.
Public Storage invests in self-storage facilities in the U.S. and Europe, and its income comes from monthly rent from consumers and businesses. The REIT reported earnings on July 27 and missed analysts' earnings-per-share estimates for the second quarter in a row. The storage REIT closed Monday at $238.97, down 3.5% year to date. It is in correction territory, 13.9% below its April 13 year-to-date high of $277.60. This REIT is the second-largest component of the ETF, with a weighting of 5.09%.
The REIT ETF will soon be an important investment benchmark, as Standard & Poor's will be adding REITs as an 11th sector of the S&P 500 Global Industry Classification Standard after the close of business on Aug. 31. These GICS changes will take effect when the S&P makes its annual rebalance of all indices on Sept. 16.
The REIT ETF is not new -- it's been trading since April 2001. Today's charts show that the REIT sector set an all-time intraday high on July 29.
Here's the daily chart for REIT ETF.
Courtesy of MetaStock Xenith
The REIT ETF closed Monday at $104.01, up 13.5% year to date and up 28.8% from its Feb. 11 low of $80.74. It was helped by its largest component, Simon Properties.
The REIT ETF has been above a "golden cross" since March 31, when the ETF closed at $95.15. A "golden cross" occurs when the 50-day simple moving average rises above its 200-day simple moving average and indicates that higher prices lie ahead.
That's been the case, and today the 50-day and 200-day simple moving averages are $97.82 and $92.54, respectively.
Here's the weekly chart for REIT ETF.
Courtesy of MetaStock Xenith
The weekly chart shows a red line through the price bars, marking the key weekly moving average (a five-week modified moving average). The green line is the 200-week simple moving average, the "reversion to the mean." The study in red along the bottom of the chart is weekly momentum (a 12x3x3 weekly slow stochastic), which scales between 00.00 and 100.00, where readings above 80.00 indicate overbought and readings below 20.00 indicate oversold. A negative weekly chart shows the stock below its key weekly moving average, with weekly momentum declining below 80.00 in a trend toward 20.00.
The weekly chart for the REIT ETF is positive but overbought, with the ETF above its key weekly moving average of $100.50 and well above its 200-week simple moving average of $83.90. At the Feb. 11 low, the REIT ETF tested its 200-week SMA, then at $81.06. That was a terrific buying opportunity for traders looking at the weekly chart.
The weekly momentum reading is projected to rise to 90.49 this week, up from 87.24 on July 29, becoming more overbought above the 80.00 threshold.
Investors looking to buy the REIT ETF should do so on weakness to $99.55 and $97.99, which are key levels on technical charts until the end of September and the end of 2016, respectively.
Investors looking to reduce holdings should consider selling strength to $104.60, which is a key level on technical charts until the end of this week.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.