Ten-year Treasury yields have jumped 16.4% since the start of February and it seems to be a foregone conclusion that the Federal Reserve will raise interest rates, perhaps as soon as June.
Fears of imminent rate hike have weighed on rate-sensitive asset classes ranging from utilities stocks to real estate investment trusts (REITs), but there is still a strong fundamental case for income investors to consider exchange traded funds such as the Vanguard REIT ETF (NYSEArca: VNQ). VNQ, the largest REIT ETF, is up 3.5% year-to-date.
While REIT investors may expect some short-term volatility, following a knee-jerk reaction to rising rates, the REITs space could continue to strengthen, along with an expanding economy. [Rate-Sensitive ETFs Get Jammed Up]
“Running the numbers on VNQ supported the idea that it was worth a significant position in the portfolio. The REIT ETF is reasonably stable in price for something that can deliver such strong returns. Depending on the time period used and whether a trader uses monthly or daily returns, the risk standard deviation can range from 115% to 160% of the standard deviation they would measure for the S&P 500,” writes Colorado Wealth Management Fund in a post on Seeking Alpha.
VNQ has become a favorite of frugal income investors, ballooning to $28.4 billion in assets under management due in part to an annual expense ratio of just 0.1%, which makes it less expensive than 92% of rival funds, according to Vanguard data.
Home to 141 stocks, VNQ offers significant leverage to the fundamentally sound commercial REIT space with office an retail REITS combining for nearly 42% of the ETF’s weight. Residential REITs receive a 16.3% weight in VNQ.