Real estate investment trusts and related exchange traded funds experienced their best yearly gain in almost a decade, and the sector could maintain their strength next year, even with rising rates on the horizon.
In 2014, the Vanguard REIT ETF (NYSEArca: VNQ) gained 32.6%, iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) rose 28.7% and SPDR Dow Jones REIT ETF (NYSEArca: RWR) increased 34.0%. [Another Nifty Small-Cap REIT ETF]
Meanwhile, FTSE NAREIT Equity REITs Index returned 32.3%, including dividends, in 2014, the highest total since 2006.
REITs have been among the best assets of 2014 as low interest rates and an improving economy helped attract income-minded investors, reports Robbie Whelan for the Wall Street Journal.
REITs provide a liquid alternative to owning physical commercial real estate properties. REITs investments also share similar attributes with stocks and bonds. Since REITs are required to distribute at least 90% of their income from rent payments to investors, these real estate investments can generate attractive yields.
For example, VNQ has a 3.13% 12-month yield, IYR has a 3.36% 12-month yield and RWR has a 2.85% 12-month yield.
Some may be concerned that REITs are sensitive to changes in interest rates. Notably, the fall in interest rates have made the asset more attractive as a yield-generating alternative, but some fear the asset will fall out of favor once rates rise.