We have seen tremendous price compression over the last several months as you can see by the list of these heavily traded ETFs and their percentage off the high (data as of 8/21/13).
- iShares U.S. Real Estate ETF (IYR) -16.80%
- Vanguard REIT ETF (VNQ) -16.30%
- iShares Mortgage Real Estate Capped ETF (REM) -23.66%
- MarketVectors Mortgage REIT Income ETF (MORT) -22.61%
However, with the 10-Year Treasury Yield rapidly approaching 3% I am starting to look at these REITs in a new light. I think that the majority of the move in interest rates has been made already and that the expectations for tapering are more than likely baked into the cake. The future risk is REITs will likely be dependent on whether or not we see additional volatility throughout the broader stock market.
The SPDR S&P 500 ETF (SPY) is currently sitting 3.74% off its highs and still has the potential for more downside. That being said, stocks have been amazingly resilient this year and betting against them has proven to be an exercise in futility. Stabilization in interest rates combined with additional strength in stocks could be just what these REITs need to bring them back to life.
The upside of the pullback in REITs is that new capital invested in this sector has the advantage of locking in higher yields along with prices that are near 52-week lows. For value income investors, taking advantage of these deep discounts is an opportunity that should be considered. However, I am recommending that if you do decide to wade into the REIT space that you do so with small allocations and a sell discipline to guard against further volatility.
David Fabian is the chief operating officer at Fabian Capital Management LLC.