Real Estate Investment Trusts, along with related exchange traded funds, have rallied this year as interest rates dipped and investors sought out income-generating assets. Now, some are growing concerned that the asset may be overheating.
Year-to-date, the Vanguard REIT ETF (NYSEArca: VNQ) has gained 17.5%, iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) rose 15.6% and SPDR Dow Jones Reit ETF (NYSEArca: RWR) increased 17.9%. [A Wonderful REIT ETF]
The benchmark MSCI U.S. REIT Index is up 15% so far this year, whereas the S&P 500 index has only gained 6.5%.
After the impressive run in REITs this year, some are worried that the asset class is vulnerable to rising interest rates and a potential shift to safer fixed-income assets, reports Alexandra Scaggs for the Wall Street Journal.
“You need to be a bit cautious,” Scott Crowe, a manager for the Resource Real Estate Diversified Income Fund, said in the article. “I don’t think the market’s particularly cheap.”
Green Street Advisors calculates that the group is trading around 18 times its adjusted funds from operations, a metric for valuing REITs. In comparison, the asset showed a 15 average reading over the past 20 years.
“REITs are still a little expensive versus stocks,” Jason Moore, an analyst with Green Street, said in the article. However, “versus bonds, they look cheap.”