Real estate investment trusts, or REITs, track the broader economy more closely than many investors realize. In fact, a research framework published by SS&C ALPS Advisors maps out exactly what drives that connection.

Key Takeaways:

• The ALPS Active REIT ETF uses a macro framework to tilt away from struggling sectors like office space.
• REITs pay no corporate taxes as long as they distribute 90% of taxable income to shareholders.
• The fund’s top three holdings target data centers, senior housing and logistics warehousing.

The ALPS Active REIT ETF (REIT) uses that framework to build its portfolio. The fund tilts toward real estate sectors with growing demand and away from those facing structural challenges. The ETF has returned nearly 15% year-to-date, according to ETF Database.

See more: Looking for REIT Winners? This ETF Has Them

Moreover, housing and commercial real estate average 15% to 18% of U.S. GDP, according to the SS&C ALPS insights. That scale makes real estate a key driver of hiring, interest rates and economic cycles.

Additionally, REITs carry a structural advantage over other real estate vehicles: no corporate taxes. To qualify, a company must distribute 90% of its taxable income to shareholders, according to the report.

Public REITs also offer portfolio diversification benefits. For example, the report notes they carry a correlation of roughly 0.60 to equities. Their correlation to bonds runs about 0.35.

How the REIT Fund Picks Its Spots

The GSI Capital Advisors team, who sub-advises the fund, uses a four-step process to build the portfolio, according to the report. First, the team estimates expected returns. Then it adjusts for economic trends, compares REIT income yields against bonds and monitors valuations on an ongoing basis.

Technology REITs made up 18.08% of the fund as of March 31, according to the fund’s fact sheet. That was above the S&P US REIT Index’s 15.19%. Hotel exposure stood at 8.11%, compared to 6.02% for the index.

Meanwhile, office space made up just 2.79% of the fund as of March 31, according to the fact sheet. That was below the S&P US REIT Index’s 3.67%. The report highlighted remote work trends as a structural headwind for that sector.

Equinix, Inc. (EQIX) was the fund’s largest holding at 10%, according to ETF Database. Welltower Inc. (WELL) also ranked near the top at 9.3%, along with Prologis, Inc. (PLD) at 9.25%. Those three holdings span data infrastructure, senior housing and logistics warehousing. Each reflects a different way that demographic growth and technology adoption are reshaping real estate demand.

For more news, information, and strategy, visit the ETF Building Blocks Content Hub.