After solid rebound, what's next for small-cap REITs?

Real estate stocks rebounded in the second quarter as investors jittery over escalating global trade tensions and the impact of a stronger dollar favored smaller, more domestically focused companies.

The trend began in March, when the Trump administration announced tariffs on imports of steel and aluminum. In response, traders bid up shares in small-cap stocks, driving the Russell 2000 index of smaller companies sharply higher. Small-cap real estate stocks also got a boost.

One example is IndexIQ's US Real Estate Small Cap ETF. The exchange-traded fund, which aims to track the performance of small-cap U.S. real estate firms, posted a gain of 11.2 percent in the past three months. In the same period, the S&P 500 rose 6.5 percent.

Small-cap REITs and other smaller-company stocks have given back some of their gains lately. Some investors may be reconsidering the view that smaller U.S. companies may fare better in the face of tariffs or other obstacles to trade.

Sal Bruno, chief investment officer at IndexIQ, recently talked about IQ's Real Estate Small Cap ETF and made the case for why small-cap REITs may make another comeback this year. Answers have been edited for clarity and length.

Q: What kind of companies make up of this fund?

A: The way we've constructed our index is to basically take the bottom 10 percent of the U.S.-listed REITs. You don't get excessive concentration on any individual sectors. That's a key part of why we have seen the volatility be a little bit more in line with the large caps, despite the fact that small caps tend to have a higher volume in general.

A: Small-cap REITs ETFs have outperformed large-caps both in the immediate past and also a longer time period as well. Typically, you are taking on more volatility in small caps than you are in large caps, and you hope to get compensated with a return for that extra risk. In this case, it's the best of both worlds, in the sense that (the fund) has gotten better returns at about the same level of risk.

Q: Real estate stocks are generally not having a good year. Is this a good time to invest in real estate stocks?

A: We're still constructive on REITs over the second half of the year. If you look at where they are yielding right now they are still at about 5.5 percent on the small caps, which is a fairly attractive yield. We think there's still more room to grow, but investors should be cautious and look at the risk involved.