Real estate has always been a bedrock for investors seeking a high-yield alternative asset. But lately, rising interest rates, recession risk, and secular changes in remote work and e-commerce have taken a toll on both the residential and commercial markets. However, despite these headwinds, some fund managers see opportunities abound.
In this article, we’ll look at the state of residential and commercial real estate markets and how DoubleLine Capital’s unique approach could provide exposure with less volatility.
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The State of Real Estate
The commercial real estate market is under pressure from a cyclical market downturn and the rise of remote work and e-commerce. Earlier this year, office vacancy rates hit 12.9%, breaching 2008 levels despite low unemployment. And unlike past downturns, secular headwinds mean the market may never see a strong rebound.
Meanwhile, the residential real estate market is less certain. While there’s little doubt that rising interest rates have dampened demand, analysts are divided on whether tight supply will make up for the difference. Moody’s predicts 98% of major markets will post home price declines over the next year, while Zillow expects these outcomes for only 39% of major markets.
DoubleLine’s Unique Approach
DoubleLine Capital is moving into the real estate market with the launch of two new actively-managed exchange-traded funds. The DoubleLine Commercial Real Estate ETF (DCMB) and the DoubleLine Mortgage ETF (DMBS) will invest in mortgage-backed securities to provide exposure to these markets with less risk than other options.
With real estate prices reflecting weakness across the economy, MBS could provide investors access to attractively priced securities and above-average yields. These securities also have less volatility than investing directly in these assets, making them a more suitable option for risk-averse investors or those looking for less exposure.
The funds offer exposure to different parts of the market:
- DCMB invests in investment-grade MBS with a 0.39% expense ratio. These holdings include agency and non-agency securities and commercial collateralized loan obligations (CLOs).
- DMBS invests in a portfolio of residential MBS with a 0.49% expense ratio. These holdings include government-backed agency and non-agency securities with actively-managed interest rate, credit, and prepayment risks.
The actively-managed funds could help investors better navigate the complexities of these markets by taking a sector-based and property-level fundamental analysis to find undervalued opportunities. In addition to being one of the few MBS-focused ETFs in real estate, these funds take a unique actively-managed approach to pick the best opportunities and manage risk.
Alternative Funds to Consider
DoubleLine’s real estate funds aren’t the only options for investors looking for active exposure to real estate. Many other ETFs offer exposure to real estate investment trusts (REITs) or other vehicles across residential and commercial sectors.
Some REIT-focused funds, sorted by yield, are listed below:
| Name | Ticker | ETF Type | AUM | Expense | Yield |
| Cambria Global Real Estate ETF | BLDG | Active | $18.8 Mn | 0.35% | 4.00% |
| ALPS Active REIT ETF | REIT | Passive | $18 Mn | 0.68% | 3.10% |
| Invesco Active US Real Estate ETF | PSR | Active | $129 Mn | 0.35% | 2.94% |
| Aventis Real Estate ETF | AVRE | Passive | $201 Mn | 0.17% | 2.81% |
When choosing between these options, investors should carefully consider the fund’s approach and holdings since they’re not market cap-weighted. And, of course, expenses and yields play an important role in ensuring the fund meets your investment objectives.
The Bottom Line
The residential and commercial real estate markets may be under pressure, but they could yield opportunities for savvy investors. DoubleLine’s new funds targeting MBS provide investors with low-volatility exposure. And with their active exposure and reasonable expenses, investors may want to consider them for their portfolio.
Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.
