The Case for Active Management in REIT ETFs: A Look at ICF
The iShares Cohen & Steers REIT ETF (ICF) is an exchange-traded fund that invests in real estate investment trusts (REITs). It is passively managed and tracks the Cohen & Steers Realty Majors Index. While ICF has a similar composition to other REIT ETFs, it has underperformed its actively managed peer, the Cohen & Steers Total Return Realty Fund (RFI), over the past five years. This highlights the benefits of active management in the REIT sector, particularly in challenging market conditions.
The main advantage of active management is that it allows portfolio managers to make tactical decisions and adjust the portfolio’s composition based on market conditions. In the case of RFI, the active management approach has resulted in superior performance compared to ICF, which is passively managed and constrained by its index. This is evident in the chart below, which shows the total return performance of RFI and ICF over the past five years.
[Chart showing the total return performance of RFI and ICF over the past five years]
As you can see, RFI has outperformed ICF by a factor of 3x over the past five years. This outperformance is due to the active management team’s ability to identify and invest in undervalued REITs, as well as its ability to adjust the portfolio’s allocation to different sectors and property types based on market conditions.
ICF ETF Composition
ICF’s portfolio is composed of a diversified mix of REITs across various sectors, including office, industrial, residential, and healthcare. The top holdings in the fund include well-known REITs such as Equinix (EQIX), American Tower REIT (AMT), and Prologis (PLD).
REITs and Interest Rates
REITs are sensitive to interest rates because they typically use debt to finance their operations and acquisitions. When interest rates rise, it becomes more expensive for REITs to borrow money, which can impact their profitability and dividend payments. This is one of the reasons why REITs have struggled in 2024, as the Federal Reserve has raised interest rates to combat inflation.
ICF Performance in 2024
ICF has underperformed its peers in 2024 due to the challenging market conditions for REITs. The fund is down over -8% year-to-date, while its peers, the Vanguard Real Estate ETF (VNQ) and the Real Estate Select Sector SPDR (XLRE), are down by similar amounts. This indicates that the underperformance of ICF is not due to its specific holdings but rather to the broader market environment for REITs.
Conclusion
ICF is a REIT ETF that has underperformed its actively managed peer, RFI, over the past five years and struggled in 2024 due to the challenging market conditions for REITs. While ICF is nearing decade-low levels, which could offer potential value for long-term investors, it is important to be aware of the challenges facing the REIT sector and the potential benefits of active management. In today’s market environment, new capital may be better allocated to actively managed REIT funds like RFI.
