Aided by a significant drop by 10-year Treasury yield, real estate investment trust (REIT) exchange traded funds were among 2014’s top performing sector ETFs and that trend is continuing this year as income investors continue the hunt for yield.
The Bloomberg REIT Index is nearing its record high set almost eight years ago. So is the MSCI REIT Index, the benchmark for the Vanguard REIT ETF (NYSEArca: VNQ), the largest U.S. REIT ETF.
“The Bloomberg index’s dividend yield as of yesterday was 3.38 percent, or a full percentage point greater than the yield on the Treasury’s 30-year bond. The gap exceeded 1 point last week for the first time since June 2012, according to data compiled by Bloomberg. The MSCI index had an even higher yield, 3.53 percent,” writes David Wilson for Bloomberg.
VNQ gained 30.4% last year, about double the gains for the benchmark financial services index, on its way to collecting $4.76 billion in new assets. VNQ is up nearly 7% in 2015. [REIT ETFs Outperform]
VNQ just 0.1% per year. That makes is less expensive than 92% of rival REIT funds. The SPDR Dow Jones REIT ETF (NYSEArca: RWR) was even more impressive last year, surging nearly 32%. With a trailing 12-month dividend yield north of 3%, RWR is also up nearly 7% to start 2015.
Investors’ affinity for REIT has not dampened in 2015 as VNQ has added over $439 million in new assets.
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.
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. [REIT ETFs Can Endure Rate Risk]
Nevertheless, many analysts argue that REIT shares will continue to perform, despite rate risks, since interest rates alone don’t dictate REIT performance and other factors may override rate concerns. For example, a strong economy and greater mergers-and-acquisitions activity could outweigh rate fears.
SPDR Dow Jones REIT ETF
