Real estate exchange traded funds (ETFs) have bounced in a range so far in 2011 along with Treasury yields, but higher rates could hurt the sector as the borrowing costs of companies and home buyers rise.
Within real estate ETFs, there are funds tracking the commercial and residential parts of the market.
Real estate investment trusts (REITs) had a surprisingly strong year in 2010 and part of the attraction is their dividends. SPDR Dow Jones REIT (NYSEArca: RWR) gained 28% last year.
“Thanks to a long period of low interest rates in the past decade, REITs amassed significant amounts of debt to grow and boost returns,” said Timothy Strauts in a recent Morningstar analyst report on the ETF.
While interest rates are still low, rates “will eventually rise, and this will increase REITs’ cost of capital and pressure asset values and reduce cash flow,” he wrote.
Some REIT ETFs:
- SPDR Dow Jones REIT (NYSEArca: RWR)
- Vanguard REIT Index ETF (NYSEArca: VNQ)
- iShares Dow Jones U.S. Real Estate (NYSEArca: IYR)
In residential real estate, there are ETFs that invest in home builders and related sectors. They trailed the S&P 500 Index last year and are lagging the market again in 2010.
Higher mortgage rates would impair an already weak housing market. According to Freddie Mac, the monthly average commitment rate on 30-year fixed-rate mortgages was 4.84% in March, down from 4.94% in February but up from 4.76% in January.