Real estate investment trust-related exchange traded funds have been steadily strengthening over the past week as a falling Treasury yields push investors back into more attractive income-generating assets.
Over the past week, the Vanguard REIT ETF (NYSEArca: VNQ) has increased 2.3% and the iShares Cohen & Steers Realty Majors (NYSEArca: ICF) rose 2.6%. Year-to-date, VNQ is up 16.6% and ICF is 18.7% higher.
The recent price action is revealing an improving risk/reward situation for bullish traders, with the REIT ETFs finding support near their 200-day moving average, writes Casey Murphy for Investopedia. Now, the funds are testing their short-term, 50-day average.
Supporting the bounce back in REITs, falling interest rates have contributed to the recovery in yield-generating assets. Specifically, the benchmark 10-year Treasury yield has declined to 2.31% from 2.63% in mid-September.
Treasury yields are edging lower due to global economic growth concerns. Specifically, investors grew wary after the International Monetary Fund cut its global growth forecast for the year, Reuters reports.
“Rising interest rates are still the REIT sector’s greatest potential headwind,” according to Morningstar analyst Abby Woodman. “Because REITs must pay out most of their income as dividends, they rely on debt for growth. For REITs, higher rates mean more-expensive debt servicing and less business reinvestment.”
Brad Case, senior vice president for research and industry information at NAREIT, also argues interest rate concerns contributed to the selling in the REITs space over September, reports Erika Morphy for GlobeSt.