Last year started with scores of market observers and pundits calling for interest rates to rise. That thesis was, of course, proven wrong and as Treasury yields tumbled, an array of rate-sensitive asset classes soared.
That included real estate investment trusts (REITs) and exchange traded funds such as the Vanguard REIT ETF (NYSEArca: VNQ). The new year has started in similar fashion. Ten-year yields slid 23.5% last month, helping launch rate-sensitive bond funds, such as the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) and the PIMCO 25+ Year Zero Coupon US Treasury (NYSEArca: ZROZ) to double-digit gains. [Bond ETF Stars Shine Again in 2015]
All of that is good news for VNQ, the largest REIT ETF, and rival funds. It is also enough to make VNQ S&P Capital IQ’s focus ETF for February.
“REITs performed well in 2014 and in early 2015 as investors sought out alternative income opportunities with the yield on the 10-year Treasury falling below 2.0%. However, we think REITs can still perform well even if yields climb higher in 2015, depending upon the confirmation and timing of potential rate hikes by the Federal Reserve. We believe the industry is economically sensitive and many of its constituents will be aided by a still-improving U.S. economy. REITs have little to no exposure to weaker geographies in Europe and Asia,” said S&P Capital IQ in a new research note.
After surging 30.4% last year, VNQ is up 5% to start 2015. 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]