Falling Rates Help Lift REIT ETFs
Real estate investment trust-related exchange traded funds have been steadily strengthening over the past week as a falling Treasury yields push investors back into more attractive income-generating assets.
Over the past week, the Vanguard REIT ETF (VNQ) has increased 2.3% and the iShares Cohen & Steers Realty Majors (NYSEArca: ICF ) rose 2.6%. Year-to-date, VNQ is up 16.6% and ICF is 18.7% higher.
The recent price action is revealing an improving risk/reward situation for bullish traders, with the REIT ETFs finding support near their 200-day moving average, writes Casey Murphy for Investopedia. Now, the funds are testing their short-term, 50-day average.
Supporting the bounce back in REITs, falling interest rates have contributed to the recovery in yield-generating assets. Specifically, the benchmark 10-year Treasury yield has declined to 2.31% from 2.63% in mid-September.
Treasury yields are edging lower due to global economic growth concerns. Specifically, investors grew wary after the International Monetary Fund cut its global growth forecast for the year, Reuters reports.
“Rising interest rates are still the REIT sector’s greatest potential headwind,” according to Morningstar analyst Abby Woodman. “Because REITs must pay out most of their income as dividends, they rely on debt for growth. For REITs, higher rates mean more-expensive debt servicing and less business reinvestment.”
Brad Case, senior vice president for research and industry information at NAREIT, also argues interest rate concerns contributed to the selling in the REITs space over September, reports Erika Morphy for GlobeSt.
However, REIT assets become more attractive when yields on other fixed-income assets are pushed down. For instance, VNQ shows a 3.51% 12-month yield and ICF has a 3.18% 12-month yield.
Additionally, the riskier mortgage-backed real estate investment trusts have some of the most attractive yields, with the Market Vectors Mortgage REIT Income ETF (MORT) showing a 12.88% 12-month yield and iShares Mortgage Real Estate Capped ETF (REM) showing a 13.42% 12-month yield.
Vanguard REIT ETF
For more information on real estate investment trusts, visit our REITs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
