Are Real Assets Being Overlooked?

by: , Chief Investment Officer and Managing Director | IndexIQ

Real assets – commodities, precious and industrial metals, timber and coal, for example – have been off the radar for many investors as markets – and market coverage – have focused obsessively on the Fed and the impact of interest rates on stocks and bonds.

Commodities sold off sharply at the end of 2018, hammered by multiple factors including trade disputes, disappointing data out of China, and concern for global growth broadly. Oil in particular had a rough 4Q before rallying on an anticipated OPEC supply cut. Soybeans, too, were caught up in the trade imbroglio as China, the biggest U.S. export market, hit U.S. soybeans with a 25% tariff1.

In spite of this short-term performance, longer-term trends continue to support the case for maintaining exposure to real assets. Viewed from the most fundamental level, no one’s making any more farmland even as the global population continues to expand, and all natural resources are ultimately finite. At the same time, the World Bank estimates that both emerging and developed economies will continue to grow and consume resources, with global growth expected to average around 4.7% in 2019-2020. Emerging markets have been the primary drivers of resource demand: over the last 20 years, most of the growth in metals, and two-thirds of the growth in energy consumption, has come from the seven largest emerging markets. While this is expected to taper off, it still provides an underpinning for global demand.

Much the same can be said for demand for other components in this asset class, including timber and water. Precious metals, and gold in particular, continue to act as a store of value and a hedge against the unknown. Not surprisingly, gold has rallied in the face of market volatility. Oil, too, may have found a bottom; median forecasts have Brent crude at $68 a barrel by the spring, up from about $57 a barrel now. Copper, with its fortunes largely tied to the industrial economy, had a tough 2018, but the prospects for 2019 look brighter based on emerging markets demand and potential progress on trade.

Real estate, as measured by the Dow Jones U.S. Real Estate Index, was down for the year as well, pressured by rising interest rates. December was particularly rough, with the broad REIT market falling -7.73%, according to the trade association NAREIT. Still, this was better than the S&P 500 which fell a little more than 9% for the month. The outlook for 2019 is cautiously optimistic. In addition to the opportunity for appreciation, REIT yields are attractive, with the yield on the FTSE NAREIT All REIT Index standing at 4.84% in the first week of January. The 30-Day SEC Yield (subsidized and unsubsidized) for the IQ U.S. Real Estate Small Cap ETF (ROOF) was 6.77 % as of December 31, 20182.

There is no disputing that commodities can be volatile (but so can equities, as we’ve seen). But for most of the asset class, the current downward pressure could unwind fairly quickly if the U.S.-China trade dispute can find a reasonable resolution. A less aggressive Fed would provide further support. And there’s another potential plus as we head into the 10th year of the expansion: commodities have tended to outperform other asset classes late in the economic cycle.

In sum, real assets are often overlooked but shouldn’t be: they can play a constructive role in a diversified portfolio for many investors. Entering the new year, it’s a good time to give this important asset class a look.

IQ U.S. Real Estate Small Cap ETF (ROOF) Standardized Performance (%) as of 12/31/2018

 

QTD
YTD
1 Year
3 Year
5 Year
Since Inception
(6/14/2011)
IQ U.S. Real Estate Small Cap ETF (NAV)
-13.61
-11.21
-11.21
2.62
3.95
7.32
IQ U.S. Real Estate Small Cap ETF (Price)
-11.65
-11.65
-11.31
2.60
3.89
7.04

The performance data quoted above represents past performance. Past performance is not a guarantee of future results. Investment return and value of the Fund shares will fluctuate so that an investor’s shares, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. Fund returns reflect dividends and capital gains distributions. Index performance is for illustrative purposes only and does not represent actual Fund performance. One cannot invest directly in an index. Performance data for the Index assumes reinvestment of dividends and is net of the management fees for the Index’s components, as applicable, but it does not reflect management fees, transaction costs or other expenses that you would pay if you invested in the Fund directly.

1. Lundgren, Luke and Bonato, Gustavo; “2019 Outlook: Soybeans bumpy ride to continue on U.S.-China tensions, large supplies and Brazil logistics”; www.spglobal.com.

2. SEC 30-Day Yield is based on net investment income for the 30-day period ended 12/31/18 divided by the offering price per share on that date. Unsubsidized SEC 30-Day Yield reflects what the yield would have been without the effect of waivers and/or reimbursements. There was no distribution for the 30-day period ended 12/31/18.

About risk

Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.

As the Fund’s investments are concentrated in the real estate sector, it is exposed to concentration risk, interest rate risk, leverage risk, property risk and management risk. The Fund is concentrated in small capitalization companies, whose stock prices generally are more volatile than those of larger companies. The Fund is non-diversified and is susceptible to greater losses if a single portfolio investment declines than would a diversified fund. The fund is not suitable for all investors. Investors in the Fund should be willing to accept a high degree of volatility in the price of the Fund’s Shares and the possibility of significant losses. An investment in the Fund involves a substantial degree of risk and the Fund does not represent a complete investment program.

Consider the Fund’s investment objectives, risks, and charges and expenses carefully before investing. The prospectus and the statement of additional information include this and other relevant information about the Fund and are available by visiting nylinvestments.com/etfs or calling 888-474-7725. Read the prospectus carefully before investing.

Fund shares are not individually redeemable and will be issued and redeemed at their NAV only through certain authorized broker-dealers in large, specified blocks of shares called “creation units”, and otherwise, can be bought and sold only through exchange trading. Creation units are issued and redeemed principally in-kind.

Commodity risk: Investments in instruments and companies that are susceptible to fluctuations in certain commodity markets. Any negative changes in commodity markets (that may be due to changes in supply and demand for commodities, market S-4 events, regulatory developments or other factors) could have an adverse impact on those companies.

Brent Crude is a major trading classification of sweet light crude oil that serves as a benchmark price for purchases of oil worldwide. This grade is described as light because of its relatively low density, and sweet because of its low sulphur content.

The Dow Jones U.S. Real Estate Index is designed to track the performance of real estate investment trusts (REIT) and other companies that invest directly or indirectly in real estate through development, management, or ownership, including property agencies.

The S&P 500® Index is widely regarded as the standard index for measuring large-cap U.S. stock market performance.

The FTSE Nareit All REITs Index is a market capitalization-weighted index that and includes all tax-qualified real estate investment trusts (REITs) that are listed on the New York Stock Exchange, the American Stock Exchange or the NASDAQ National Market List. The FTSE Nareit All REITs Index is not free float adjusted, and constituents are not required to meet minimum size and liquidity criteria.

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

New York Life Investments is a service mark and name under which New York Life Investment Management LLC does business. New York Life Investments, an indirect subsidiary of New York Life Insurance Company, located at 51 Madison Avenue, New York, NY 10010, provides investment advisory products and services. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC and serves as the advisor to the IndexIQ ETFs. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Salvatore J. Bruno

Chief Investment Officer and Managing Director | IndexIQ

Sal is Chief Investment Officer at IndexIQ, where his primary responsibility includes developing and maintaining the firm’s investment strategies. Sal joined IndexIQ in 2007 from Deutsche Asset Management (DeAM) where he held a number of senior positions

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