Federal Reserve Chairman Ben Bernanke is delivering congressional testimony Wednesday, putting scores of interest rate-sensitive ETFs in play. Income investors might want to keep a close eye on some popular ETFs tracking real estate investment trusts (REITs) in the wake of the Fed chief’s commentary.
Bernanke’s prepared remarks were released Wednesday morning. He said the Fed’s asset purchases depend on economic and financial developments, and are “by no means on a preset course.”
From the time that yields on 10-year Treasurys started rising in earnest on June 3 until last week when Bernanke made comments that implied the Fed may not taper its $85 billion-a-month bond-buying efforts as soon as some investors previously expected, REIT ETFs tumbled. For example, the Vanguard REIT Index ETF (NYSEArca: VNQ) lost 3.2% from June 3 through July 8. [Rate Sensitive ETFs Smacked as Yields Spike]
VNQ and rival funds have bounced back. Since July 9, the Vanguard fund is up 2.3% while the iShares U.S. Real Estate ETF (NYSEArca: IYR) has climbed 2.4%. The REIT trade was previously deemed “crowded,” making for a messy exit when rates rose, but some yield-starved investors have embraced the opportunity to buy ETFs such as IYR and VNQ following the funds’ recent dips. [Diversified REIT ETFs for Yield]
IYR was particularly hard hit on tapering talk. At its May peak, the ETF traded near $76, but swooned to June lows below $64. It closed at $68.50 Tuesday. “Last week, following Bernanke’s latest comments, the ETF jumped up on elevated volume to score an ‘upside breakaway gap’ and a powerful bullish signal, reports Michael Kahn for Barron’s.
Many of the largest REIT ETFs track the same batch of companies, including Simon Property (NYSE: SPG), Public Storage (NYSE: PSA) and Ventas (NYSE: VTR), so factors such as fees and yield take on added importance. VNQ has annual of just 0.1% compared to 0.35% for IYR. Over the past year, the Vanguard fund has outpaced its iShares rival by 230 basis points.
Small-cap REITs are also worth considering. The IndexIQ Small-Cap Real Estate ETF (NYSEArca: ROOF) has surged 20.4% in the past year and has a trailing 12-month yield of 4.61%.
Vanguard REIT Index ETF
ETF Trends editorial team contributed to this post.