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.
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.