Real estate investment trusts (REITs) and the corresponding exchange funds are seen as vulnerable to higher interest rates. Good thing the Federal Reserve continues to sound a dovish tone on borrowing costs.
REITs provide diversification benefits as the asset shows a lower correlation to stocks and bonds. Over the past three decades, REITs’ rolling 36-month correlation to other stocks ranged from 0.89 to negative 0.16 – a value of 1 translates to perfect lock step while a negative value means the two assets moved in opposite directions. The correlation between REITs and Treasuries was 0.74 to negative 0.66 over the same period.
With the interest rate scenario for 2016 looking like two rate hikes instead of the previously expected four, reviewing ETFs such as the SPDR Dow Jones REIT ETF (NYSEArca: RWR) could prove to be a winning strategy.
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.
RWR “experienced YTD capital inflows of $134 million as of March 4, 2016, which is somewhat significant for the fund’s AUM of $3.37 billion. The fund was created in April 2001 to track the investment results of the Dow Jones U.S. Select REIT Index, which is composed of equity REITs that manage commercial properties,” reports Investopedia.
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.
Rents have increased by over 20% since the start of 2010, and most economist expect 2016 to be another strong year.
[related_stories]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.
RWR has a dividend yield of almost 3.2%. The ETF charges 0.25% per year, or $25 for each $10,000 invested.
SPDR Dow Jones REIT ETF
