With more traders anticipating the Federal Reserve will hold off on its first interest rate hike in almost a decade, yield-generating real estate investment trusts and sector-related exchange traded funds have bounced back, trading above their long-term trend lines.
Over the past month, the Vanguard REIT ETF (NYSEArca: VNQ) gained 6.9%, SPDR Dow Jones REIT ETF (NYSEArca: RWR) rose 7.4% and iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) advanced 5.9%. The three broad REIT ETFs are now trading above their 200-day simple moving averages. [Don’t Write-Off This REIT ETF]
REITs have rallied as the Fed pushes off monetary policy changes. New York Federal Reserve Bank President William Dudley argued that it is too early to think about a rate hike due to concerns about global growth, reports Francesca Landini for Reuters.
“The situation changed over the last few months,” Dudley told CorrierEconomia. “It’s true we thought we could raise interest rates by the end of 2015, but turbulence on financial markets, modest global growth, energy prices and macro-prudential imbalances are slowing this process down.”
Consequently, with interest rates expected to stay near-zero for longer and yields on benchmark 10-year Treasuries at 2.03%, REITs and related ETFs look much more attractive for income-oriented investors.
Specifically, VNQ has a 4.14% 12-month yield, RWR has a 3.38% 12-month yield and IYR has a 3.94% 12-month yield.
Previously, REITs have weakened in anticipation that the Fed hike rates, which would cut into potential revenue for the real estate companies.
“Interest rates undoubtedly will rise at some point, and higher interest rates remain the REIT sector’s greatest potential headwind,” according to Morningstar analyst Robert Goldsborough. “As rates rise, REITs’ interest payments go up, which means REITs have less cash flow available for dividends for equity investors. As a result, higher rates mean greater interest expense. Not surprisingly, REITs with lots of debt and higher levels of near-term maturities – which would need to be refinanced – will fare worse than REITs with less debt and long-dated maturity schedules.”
Vanguard REIT ETF
For more information on real estates investment trusts, visit our REITs category.
Max Chen contributed to this article.