The recently launched Guggenheim S&P 500 Equal Weight Real Estate ETF (NYSEArca: EWRE), which follows an equal-weight indexing methodology that leans toward smaller companies, has 4.2% in HCN, 4.1% in VTR and 4.0% in HCP.
The Morningstar analyst warned that REITs could eventually underperform in a rising rate environment as the higher rates would cause greater debt financing costs, put pressure on expenses of REIT cash flow, and lead to higher cap rates. Moreover, funds could flow out of REITs as interest rates rise and weigh on valuations.
Nevertheless, Lukasik argues the REITs are capable of withstanding shocks as the majority of U.S. REITs have improved their balance sheets since the last downturn and remain more conservatively leveraged than the last boom. Additionally, many U.S. REITs still carry interest rates that exceed borrowing costs over the next few years, which can help provide a cushion in the medium-term even if interest rates rose 1%
For more information on real estate investment trusts, visit our REITs category.
Max Chen contributed to this article.