Contrarian Play:
As mentioned previously, publicly traded real estate securities are an attractive contrarian play right now considering they’ve recently underperformed the market as measured by the real estate sector ETF (XLRE) versus the S&P 500. For your consideration, the following table shows the recent performance (through yesterday) of 40 different sector and industry ETFs, including XLRE.
Discount To NAV:
The Nuveen Real Estate Income CEF currently trades at an attractive 6.02% discount to its net asset (see the following chart for recent history).
The discount may be due to a variety of factors including overly fearful investors selling off real estate in general out of fear of rising interest rates and as they rotated into other sectors following the US election. And while there is no guarantee this fund will ever erase the discount (it could actually increase) we’re far more comfortable buying JRS at a discount than if it were trading at a premium.
Risks:
Investing in CEFs and in JRS in particular involves risks that are worth considering. For example, the fund uses leverage (i.e. it borrows money). And while the amount of leverage (30%) is conservative and manageable in our view (it’s also near the maximum allowed by regulations designed to keep CEFs safe), it could work against the fund. Specifically, if real estate securities actually decline in value, the declines could be magnified by the leverage depending on how well the Nuveen management team manages it (more information on the management team is available here).
Another big risk factor is the expense ratio which was recently 1.27% (reasonable for a CEF) as shown in the following table.
At Blue Harbinger, we generally despise management fees (because they detract from long-term performance), and we work very hard to eliminate or minimize management fees as much as possible. However, in the case of CEFs, some investors are comfortable paying the fees in exchange for the high income and “sleep well at night” peace of mind that CEFs can offer. Specifically, if you are a mature income-focused investor then it can make sense to pay someone else (in this case Nuveen) to manage a portfolio (in this case JRS) to generate the income you need (i.e. the 9.2% distribution yield).
However, if you are a younger investor, still saving for retirement, then we generally do NOT recommend investing in CEFs because you’d be far better off investing in low cost ETFs (such as those listed in our ETF table above) because the money you save on fees (you don’t need the high income yet) will add to the long-term growth and compounding of your nest egg, which can be extremely valuable over a +30 year time horizon.
Conclusion:
Overall, we consider the Nuveen Real Estate Income Fund to be an extremely valuable investment opportunity for some investors. Specifically, it passes the bar we set in our recent article How to Pick a Good Closed-End Fund, and we like it specifically because of its discounted price, the contrarian outlook for real estate, and its big sustainable distribution yield. If you are a young person still saving for retirement then this fund is probably NOT for you, but if you are a mature retired (or semi-retired) investor then the Nuveen Real Estate Income Fund (NYSE:JRS) is worth considering for an allocation within your diversified income-focused portfolio.
Note: This article was written by Blue Harbinger. At Blue Harbinger, our mission is to help you identify exceptional investment opportunities while avoiding the high costs and conflicts of interest that are prevalent throughout the industry. We offer additional free reports and a premium subscription service at BlueHarbinger.com. If you are ever in the Naperville, IL, USA area, our founder (Mark D. Hines) is happy to meet you at a local coffeehouse to talk about investments. Please feel free to get in touch.