The Federal Reserve has already indicated that it won’t allow the federal fund rate to rise until the middle of 2015, so investors still have some wiggle room. [Rate Relief for mREIT ETFs]
Potential investors should be aware that REITs are vulnerable to a rising rate environment. Certain REITs, notably mortgage-backed securities, have to be marked to market as rates rise, which lead to losses. Additionally, REITs see higher costs as rates increase.
“Mortgage REITs are financial firms that engage in arbitrage on the spread between the short-term interest rate and income from mortgage-backed securities,” according to Moringstar analyst Abby Woodham.
Consequently, the arbitrage opportunity dwindles as rates rise and the spread dwindles, which causes REITs to lose profits.
For more information on real estate investment trusts, visit our REITs category.
Max Chen contributed to this article.