Real estate investment trusts and related exchange traded funds have weakened in response to rising rate concerns, but even as Treasury yields have recently declined, REIT ETFs have failed to regain much needed momentum.
For example, the Vanguard REIT ETF (NYSEArca: VNQ) is off almost 6.7% over the past month even as 10-year Treasury yields have dropped 2% over that period. Fund managers argue that while the real-estate funds may experience short-term swings due to interest rate changes, the funds’ underlying outlook remains positive, pointing to a growing U.S. economy, improving employment rate and greater foreign investment demand for U.S. REITs. [Fundamentals to Support REIT ETFs, Outweighing Rate Risk]
Now, the MSCI REIT Index, VNQ’s underlying benchmark, is heading toward its worst annual performance since 2008.
“An index of REIT stocks is on track for its worst year since 2008 after a six-year rally pushed it up 348%, including dividends, from its financial-crisis-era low, as of Friday’s close. The MSCI US REIT index, which includes 143 companies, already was lagging behind the broader market this year amid concerns that REIT stocks will suffer if the Federal Reserve raises interest rates. Fresh worries about the consequences of slower growth in China in recent weeks have ratcheted up the anxiety,” reports Liam Pleven for the Wall Street Journal.
VNQ is down 7% over the past month and investors have yanked more than $658 million from the fund this year. 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]
Additionally, investors would also be taking a broad view on economic growth with REITs investments. Some investment experts argue that since commercial property has a larger presence in the U.S. economy than REITs do in the equities market, investors could benefit from a 5% to 10% allocation to REITs to bring their investments more in line with commercial property’s significance in the overall economy. [REIT ETFs Still Have a Place in an Investment Portfolio]
Apartment demand has not let up, despite calls that improving economic conditions would push more into buying homes. Supporting the increased rental demand, millennials are finding jobs and moving out to cities. Without meaningful wage increases, renters may be stuck with rental apartments as they are not able to save enough for that first home down payment.
Vanguard REIT ETF
