Heading into the start of Monday’s trading session, the S&P 500 was up 2.6% in the past month. Scores of market-based and sector exchange traded funds have delivered trailing 30-day returns in excess of that 2.6%.
Over that time, health care, staples and energy ETFs, just to name a few sectors, have outpaced the S&P 500, but one previously prized income-generating asset class has been in a swoon: Real estate investment trusts (REITs).
Not including Monday’s performances, the Vanguard REIT ETF (NYSEArca: VNQ), iShares U.S. Real Estate ETF (NYSEArca: IYR), SPDR Dow Jones Reit ETF (NYSEArca: RWR) and First Trust S&P REIT Index Fund (NYSEArca: FRI) are all off about 6% in the past month. The culprit is easy to spot: 10-year Treasury yields have jumped 10% since Oct. 23. [Rising Rates Pull REIT ETFs Into Bear Market]
Higher interest rates not only make REITs less attractive from a yield standpoint, but also cause concern about the ability of highly levered REITs to continue paying and raising dividends. [REIT ETFs: Catching a Falling Knife]
Some market observers see opportunities with REITs.
“I actually like the apartment REITs even though they’ve been under pressure,” said Jeff Saut, chief investment strategist at Raymond James, in an interview with Yahoo Finance last week. Saut points out that as the U.S. economy improves, some of the 23 million 19 to 34 year-olds that either live with roommates or at home with mom and dad will depart for their own quarters.
IYR has a 12.2% weight to residential REITs while VNQ’s residential exposure is 15.7%. The iShares Residential Real Estate Capped ETF (NYSEArca: REZ), which has a trailing 12-month yield of 3.29%, is a pure play on the residential REIT theme.
While some individual apartment REITs, including some held by the aforementioned ETFs, could benefit as more young workers become more upwardly mobile, there are still risks to REIT funds with residential exposure.
Namely, periods of economic strength are often associated with periods of rising rates. That may be a boon for some apartment REITs, but it may not be beneficial to REIT ETFs with heavy residential exposure because some would-be home buyers could be priced out of the market due to higher mortgage rates.
REZ has plunged almost 9% in the past, a nearly perfect inverse move with 10-year yields. When 10-year yields spiked more than 100 basis points from May 1 to Aug. 1, REZ lost 7.6%.
iShares Residential Real Estate Capped ETF