Investors have been wary of real estate investment trusts and related exchange traded funds as the Federal Reserve cogitates on an interest rate hike. However, people should not passover the asset class altogether.

Investors can gain exposure to the broad REITs category through ETFs. For example, the Vanguard REIT ETF (NYSEArca: VNQ) and SPDR Dow Jones REIT ETF (NYSEArca: RWR) track a group of REITs, excluding mortgage REITs and non-real-estate specialty REITs. The iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR), though, takes a broader view and includes the more specialized REITs. [Sticking With a Popular REIT ETF]

REITs are securities that trade like a stock and invest in real estate directly through property ownership or mortgages. Consequently, revenue are mainly generated through rents or interest on mortgage loans. To qualify for special tax considerations, the asset also distributes the majority of income, about 90% of taxable profits, to investors as dividends.

Additionally, REITs provide diversification benefits as the asset shows a lower correlation to stocks and bonds. Over the past three decades, REITs’ rolling 36-month correlation to other stocks ranged from 0.89 to negative 0.16 – a value of 1 translates to perfect lock step while a negative value means the two assets moved in opposite directions. The correlation between REITs and Treasuries was 0.74 to negative 0.66 over the same period.

Nevertheless, some investors fear REITs will act negatively in rising interest rate environment. The high dividends in REITs are attractive in a low-rate environment but are less enticing once safer Treasuries show higher rates. [Don’t Overload REIT ETF Allocations]

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