Buoyed by the Federal Reserve’s lower for longer stance on interest rates and investors’ seemingly unquenchable desire for income, real estate investment trusts (REITs) and the corresponding exchange traded funds are among this year’s most popular income-generating asset classes.
The Vanguard REIT ETF (NYSEArca: VNQ), SPDR Dow Jones REIT ETF (NYSEArca: RWR) and iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) are among the most popular REIT ETF plays. While these are some of the top-performing sector funds this year, some industry observers and technical analysts believe the group can keep soaring.
“The bullish theory is predicated on the idea that after taking a long time for a security to return to its initial high during the “cup” phase, the “handle” phase is much briefer and shallower. This theoretically indicates an increased eagerness on the part of investors to buy the security since they did not allow it to pull back nearly as long or as deep as occurred in the cup phase. Regardless of the theory, the chart pattern has often been effective in forecasting an eventual breakout and advance above the former highs. And indeed, the Dow Jones REITs Index has broken out to new highs over this past month,” according to See It Market.[related_stories]
The Dow Jones REITs Index is the underlying benchmark for IYR.
There are also fundamental considerations for REIT ETFs, not the least of which is the reclassification of real estate as the eleventh GICS sector at the end of August.
“Demand for US real estate securities accelerated in May, as exchanged traded funds focused on the investment segment gathered $1.31 billion of new money, up from $510.4 million in April,” Todd Rosenbluth, S&P Global Market Intelligence Director of ETF Research, wrote in a note. “The popularity of REIT ETFs persisted last month even as health care and information technology ETF had net client withdrawals.”
The sudden spike in interest for REIT ETFs may be due to the pending GICS sector elevation of REITs as the REITs category remains underweighted in many actively managed mutual funds.
REITs may continue to experience a short-term boost in the months ahead as the S&P Dow Jones Indices stated it would add an 11th sector to its Global Industry Classification Standard, creating a new Real Estate Sector from the Financial Sector. The changes to the S&P 500 index will be implemented after the close of business on September 16, 2016.
“Based on the 50%-100% rule of thumb, if successful, the recent breakout would suggest an advance of 40-80 above the top of the range. That would be an extraordinary move, especially given the latter stages of the market cycle,” adds See It Market.
iShares Dow Jones US Real Estate Index Fund
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.