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Investors hate real estate stocks — and that could be good news for the sector

The S&P 500's newest sector isn't getting much love.

Real estate, which was broken out of the financials at the end of the summer to create an 11th distinct sector, is the most underweighted sector by active managers, according to research from Bank of America Merrill Lynch.

Not only is real estate the sector managers are least exposed to relative to their benchmarks, but it is also the sector that the smallest number of managers overweight.

Interestingly, the moderate positioning in real estate stocks could actually serve as a contrary indicator. With so little money in the group, marginal funds may flow out of heavily owned sectors like consumer discretionary and tech, and into the high-yielding real estate stocks.

In fact, the BofAML research team has found that overweighted stocks tend to outperform and underweighted to underperform; unsurprisingly, two of the three most under-owned stocks now are Realty Income Corp. and Federal Realty Investment Trust, they found.

It is no secret that the yield environment has served as the major problem for real estate names. Bond yields have recently risen substantially, hurting these high yielding stocks. And with the Federal Reserve expected to continue to raise rates in 2017, few appear to see a powerful reason to buy.

"This is an interest-rate sensitive sector, and that scares away a lot of investors," commented Chad Morganlander, portfolio manager at Stifel Nicolaus.

Still, Morganlander is not one of those managers who is underweighting real estate.

"We believe that overall for 2017, this sector is going to catch a bid, and we would be buyers here," he said Tuesday on CNBC's "Trading Nation."

He advises keeping it simple. Rather than picking individual real estate investment trusts, "I would just go out and buy the actual ETF and I wouldn't go into specific names. I think you have a broad-based win by allocation 3 to 5 percent to the real estate sector in one's portfolio."

The Real Estate Select SPDR Fund (XLRE), which tracks the sector, offers a dividend yield of nearly 4 percent. However, the amount of diversification it offers is limited; the ETF tracks just 29 stocks, and the two largest (Simon Property Group and American Tower) make up more than 18 percent of the fund.


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

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Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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