Plenty of interest-rate sensitive asset classes and sectors struggled last year against the backdrop of the Federal Reserve’s first interest rate hike in nearly a decade, but with expectations rising that the Federal Reserve may not be able to raise rates this year, rate-sensitive asset classes have some momentum.
That includes real estate stocks and the corresponding exchange traded funds, such as the Vanguard REIT ETF (NYSEArca: VNQ). Expectations for higher interest rates usually drag on REITs as the dividend-yielding equity asset look less attractive relative to safer government bonds in a rising rate environment.
Some analysts have also dismissed claims that there is a bubble in the real estate space where prices have been rising, contending that the higher prices reflect the dearth in supply. While the Federal Reserve is moving toward interest rate normalization, the Fed has reassured markets that it will make gradual hikes.
VNQ “trades with an expense ratio that is 0.12%, which is lower than 91% of the funds with similar holdings. The fund’s managers seek to track the return of the MSCI US REIT Index by investing in companies that purchase properties such as office buildings, hotels, and storage. Taking a look at the weekly chart below, you can see that the fund is trading within an extremely strong uptrend. The recent pullback has sparked concern among some long-term investors, but the proximity to the major support of the long-term trendline and 200-week moving average could be providing an ideal entry point based on the risk/reward,” according to Investopedia.
Rents have increased by over 20% since the start of 2010, and most economist expect 2016 to be another strong year.
The influx in rental demand has also pushed developers to build almost 1 million apartments in the U.S. over the next three years, compared to the nearly 900,000 constructed in the previous three years.
Industry observers also argue that REITs could see continued strength in 2016 as the real estate asset category is elevated to the 11th headline sector in the Global Industry Classification Standard, or GICS. As REITs gain a sector classification, investors may no longer relegate real estate as an alternative investment and funnel more money into the area as part of a diversified equity portfolio.
Vanguard REIT ETF
