Rising Interest Rates Pull REIT ETFs Toward Bear Market

August 25th at 11:17am by Tom Lydon

Real estate investment trust exchange traded funds are taking a beating as investors push rates higher in anticipation of the Federal Reserve reversing its accommodative stance.

“The biggest risk to the sector is the prospect of rising interest rates,” according to Morningstar analyst Abby Woodham. “When rates rise, REITs will have to allocate more cash to debt servicing and less to business reinvestment and dividend payouts to investors. Higher rates will also make REIT yield less attractive, putting downward pressure on the sector’s valuation. When the cheap cash party ends, REITs with less leverage will be able to continue to grow efficiently and weather volatility.”

Yields on the benchmark 10-year Treasuries have increased to as high as 2.9% from a 1.63% low in May.

Meanwhile, the Vanguard REIT ETF (NYSEArca: VNQ) declined 15.8% since its May 21 high. The ETF has a 0.10% expense ratio and a 3.59% 12-month yield. [REIT ETFs: Time to Catch the Falling Knife?]

VNQ tries to reflect the performance of the MSCI US REIT Index, which tracks a diversified selection of property sectors but excludes mortgage REITs and non-real estate specialty REITs. [Mortgage REIT ETFs Plundered by Rising Rates]

As of the end of July, the ETF’s sub-sector allocations include diversified REITs 8.7%, industrial REITs 5%, office REITs 13.1%, residential REITs 16.7%, retail REITs 27.7% and specialized REITs 28.8%.

Top holdings include Simon Property Group 9.8%, HCP 4.5%, Public Storage 4.4%, Ventas 4.3% and Prologis 3.7%.

The iShares US Real Estate ETF (NYSEArca: IYR) is down 16.2% since its May 21 high. The fund has a 0.47% expense ratio and a 3.76% 12-montn yield.

IYR tries to reflect the performance of the Dow Jones Real Estate Index, which also does not exclude mortgage, timber, prison and tower related REITs, unlike other related ETFs.

Sub-sector allocations include specialty REITs 29.5%, retail REITs 19.6%, industrial REITs 18.7%, residential REITs 12.8%, mortgage REITs 7.2%, hotel & lodging REITs 5.0%, real estate services 3.0% and diversified REITs 2.1%.

Top holdings include Simon Property 8.1%, American Tower 4.9%, Public Storage 4.1%, HCP 3.3% and Ventas 3.2%.

The SPDR Dow Jones REIT ETF (NYSEArca: RWR) dropped 15.5% since its May 21 high. The ETF has a 0.25% expense ratio and a 2.99% 12-month yield.

RWR tries to reflect the performance of the Dow Jones US Select REIT Index, which excludes mortgage and timber related REITs.

Sub-sector allocations include regional malls 17.3%, apartments 16.7%, healthcare 14.7%, office 11.6%, strip centers 7.7%, self-storage 7.5%, industrials 7.4%, hotels 6.5%, diversified 4.6%, mixed industrial 4.1%, manufactured homes 1.0% and factory outlets 0.7%.

Top holdings include Simon Property 10.8%, Public Storage 5.4%, HCP 4.3%, Ventas 4.2% and Prologis 4.2%.

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.