REIT ETFs May Hold Their Own in Rising Rate Environment

Many are worried that a rising interest rate environment could weigh on real estate investment trusts and sector-related exchange traded funds after quantitative easing policies helped inflate the asset category. However, REITs may be less vulnerable than may believe as strong economic growth could help sustain the sector.

Year-to-date, the Vanguard REIT ETF (NYSEArca: VNQ) fell 0.9%, SPDR Dow Jones REIT ETF (NYSEArca: RWR) rose 0.6% and iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) dropped 0.7%. [REIT-bound: Yield-Generating ETFs More Attractively Valued]

The REITs ETFs have previously been a popular income-generating play in low-yield environment. For instance, VNQ has a 3.92% 12-month yield, RWR has a 3.19% 12-month yield and IYR has a 3.71% 12-month yield. [Looking At REIT ETFs In A New Light]

As interest rates are expected to rise and demand for riskier source of yield wanes, some analysts worry that a correction is due for the REITs sector.

However, real estate investment firms argue that values do not have much further to fall and are less vulnerable to the threat of rising rates than many would believe, pointing to positive signals like job growth and rising inflation ahead, which would help offset any weakness from a higher interest rate, reports Henny Sender for the Financial Times.

“We have been running our business with the expectation that interest rates will increase, particularly in the United States; in fact, we welcome this. Interest rates will rise because the economy is improving and that is positive for business,” Brookfield Asset Management previously told shareholders.

Moreover, Goldman Sachs believes the macro outlook is supportive for the residential market.