It can be easy to get caught up in trying to pick winners and losers when it comes to buying individual stocks. The thrill of the chase, the satisfaction of making a good call, it's all part of the allure of investing.
But when it comes to buying shares of real estate investment trusts (REITs), it might be wiser to set aside the winner-takes-all attitude, especially when it comes to those specializing in warehouses and other logistics properties. Why? Because this sector is demonstrating such robust health and potential that it can be more about enjoying the ride than betting on a single horse.
The e-commerce boom, fueled by technological advancements and accelerated by the pandemic, has created a paradigm shift in how we shop for and receive goods. The unprecedented level of need for warehouse space, logistics hubs, and distribution centers to handle the sheer volume of online orders has resulted in record-low vacancies, and rising rents and income for owners of these properties.
Stable, long-term growth in a resilient business
And it isn't just about demand. Even during economic downturns, the essential nature of warehouses and logistics infrastructure positions industrial REITs to weather the storms more effectively than other sectors.
This resilience and the dividend component -- REITs must pay out at least 90% of their taxable income in dividends every year -- provides a level of security to investors, making these stocks a stable component of a diversified portfolio.
Moreover, the dynamics of the warehouse real estate market itself are conducive to stable, long-term growth. Warehouses are less management-intensive and less expensive to maintain than many other types of commercial real estate.
Industrial REITs also are benefiting from the on-shoring boom: More manufacturers and distributors are looking for ways to keep more inventory and materials close by or onsite after seeing the havoc wrought by pandemic shutdowns and the subsequent supply chain snarls.
They are also often located in strategic locations that maintain or increase their value over time. This combination of factors gives the players in this sector strong fundamentals, providing a solid base for steady income and potential capital appreciation.
A good place to start: exchange-traded funds
Trying to pick a single winner in this sector might end up being more of a gamble than a sound strategic move. With so many strong industrial REITs showing steady growth and healthy dividends, the risk of choosing a laggard or missing out on a leader can be high.
A good way to avoid that is to consider taking a diversified position in this sector, just as you should with your entire portfolio. You can start with exchange-traded funds, which aim to track the performance of specific indexes.
One broad-based example is the Vanguard Real Estate ETF (NYSEMKT: VNQ), which holds a basket of about 160 REITs and tracks the MSCI U.S. REIT Index. Its holdings are market-cap weighted, and the largest warehouse owner in the world -- Prologis(NYSE: PLD) is its largest single holding at about 8%.
There also are sector-specific EFTs such as the Pacer Industrial Real Estate ETF(NYSEMKT: INDS), which seeks to track the Solactive GPR Industrial Real Estate Index. It lists Prologis and self-storage giantPublic Storage(NYSE: PSA) as its two largest holdings by far at about 15% each.
A diverse approach to taking advantage of a single trend
Prologis owns and operates well over 1 billion square feet of large warehouse space around the world, and it has been a strong performer for years.
Other REITs to consider include Rexford Industrial(NYSE: REXR), owner of about 43 million square feet of logistics space in Southern California, and Terreno Realty(NYSE: TRNO), which specializes in small warehouses in six markets on the East and West coasts. You can even consider Americold(NYSE: COLD), which (as its name implies) operates specialized refrigerated storage spaces in locations across the country.
Choosing a few of these solid companies or ETFs can help you take advantage of the broader trends driving the growth of the entire logistics properties sector without the stress of putting your stake in one stock.
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Marc Rapport has positions in Prologis, Terreno Realty, and Vanguard Specialized Funds-Vanguard Real Estate ETF. The Motley Fool has positions in and recommends Prologis, Rexford Industrial Realty, Terreno Realty, and Vanguard Specialized Funds-Vanguard Real Estate ETF. The Motley Fool has a disclosure policy.
