“Buy land. They’re not making it anymore.”

That famous bit of advice from Mark Twain is especially compelling, during periods of rising inflation as we’re experiencing now.

Real estate has long been an effective inflation hedge, but not many investors have the firepower to buy up all their houses on the block. Real estate investment trusts (REITs) are a less capital-intensive way to own properties.

REITs typically invest in either mortgages or properties ranging from shopping centers and office buildings to multifamily apartment units, although data centers and timberlands also have been wrapped up in the REIT structure.

REITs aren’t totally immune to the effects of inflation, since they can be negatively affected by rising interest rates. If a REIT borrows heavily to finance acquisitions, for instance, it will find its cost of financing rise along with rates.

However, less leveraged REITs and those that operate in other countries won’t be as heavily impacted as interest rates drift higher. They also have the ownership advantage of raising rents when the economy heats up, increasing cash flows along with the pace of inflation.

Historically, property prices also have kept track with inflation, generating capital appreciation in addition to growing cash flows.

Which brings me to a benchmark exchange-traded fund (ETF) that’s appealing now: iShares Residential and Multisector Real Estate Capped ETF (REZ).

REZ is an ETF that tracks the investment results of the FTSE NAREIT All Residential Capped Index composed of U.S. residential, health care and self-storage real estate equities.

With net assets of $1.1 billion, REZ is operated by ETF behemoth BlackRock (NYSE: BLK), with a portfolio of 43 holdings that provides exposure to the U.S. residential real estate market via REITs. With a yield of 2.34% and a reasonable expense ratio of 0.48%, REZ is a hedge against rising inflation that also allows investors to tap the booming real estate market.

The following table depicts REZ’s historical performance (as of January 31):

Among the most successful inflation hedges within the REIT category is self-storage, a property type characterized by short lease terms and therefore frequent lease turnover and renegotiation.

Americans are increasingly nomadic, moving from location to location, in turn fueling demand for storage units.

REZ’s top holding is Public Storage (NYSE: PSA), at 9.86% of assets. PSA is the operator of those orange self-storage warehouses you see everywhere. You probably never thought of PSA as an effective inflation hedge but think again.

With a market cap of $61.7 billion, Public Storage is the largest storage company in the U.S. This REIT has an ownership interest in 2,504 U.S.-based self-storage facilities and 239 European storage facilities. The storage spaces are available for lease on a month-to-month basis, for personal and business use.

As the number of Americans selling their homes and storing their belongings skyrockets, Public Storage is the best way to leverage this trend.

Other top REZ holdings that I particularly like include Welltower (NYSE: HCN) at 7.59% of assets and Ventas (NYSE: VTR) at 4.69%.

Welltower invests in senior housing, assisted living communities, post-acute care facilities, and medical office buildings. Demographic trends favor long-term growth for HCN, as Americans get older and sicker. All of those Baby Boomers are turning gray and need ever-greater care.

Ventas invests in hospitals, skilled nursing facilities, senior housing facilities, medical office buildings and other health-care related facilities. As with Welltower, Ventas is a dual play on real estate growth and booming health care demand among the elderly.

Read This Story: Straight Talk About Inflation

The U.S. consumer price index (CPI) jumped by 7.5% in January, the largest year-over-year increase since 1982. Let’s take a look at how REITs as a whole fared during periods of exceptional inflation.

Consumer price inflation in the U.S. reached a peak of 13.5% during 1979, the worst inflationary year since 1947. Dividend income from REITs traded through the stock exchange averaged 21.2% that year and total returns amounted to 24.4%, more than preserving for REIT investors the purchasing power that they had lost to inflation.

Inflation averaged 11.6% per year during 1978–1980, the worst three-year period in six decades. Again, however, publicly traded equity REITs outpaced inflation with income and total returns averaging 12.2% and 23.1% per year, respectively.

The period 1974–1981 was the most inflationary eight years in the history of the CPI at 9.3% per year, but equity REIT returns easily preserved purchasing power, with income and total returns averaging 10.2% and 16.3% per year.

I expect REZ to provide the same sort of outperformance during this current period of rising inflation.

PS: In addition to real estate, a classic inflation hedge is gold. Our team has pinpointed a small-cap gold mining stock that’s on the cusp of exponential gains. For details on this under-the-radar gold play, click here.

John Persinos is the editorial director of Investing Daily.

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