Many market participants believe the stage is for the Federal Reserve to raise interest rates for the first time in 2016 following its December meeting.
Predictably, that speculation has weighed heavily on some income-generating asset classes and sectors.
Real estate investment trusts and sector-related exchange traded funds have been among the most popular investments in an extended low-rate environment.
However, after this year’s run, REITs may be starting to look pricey. Additionally, some market observers believe enthusiasm for real estate becoming the eleventh GICS sector, which was made official in September, was baked into the sector before the event happened.
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After soaring earlier this year, the Vanguard REIT ETF (NYSEArca: VNQ), the largest exchange traded fund holding real estate investment trusts (REITs), has recently languished.
“Investors are selling high yield today for the same reason they sold last year: They’re anticipating the Fed to raise the federal funds rate in December. Conventional wisdom argues that when interest rates rise, income equity investments fall, and high-yield equity investments fall more than most,” reports ETF Daily News.
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.
[related_stories]The ALPS Alerian MLP ETF (NYSEArca: AMLP), the largest exchange traded fund holding master limited partnerships (MLPs), is also retreating along with other MLP ETFs. Over the past week, AMLP is down more than 4% and some of that loss could be attributable to Fed fears.
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“Because REITs, MLPs, and BDCs are pass-through entities, the retained earnings pool mostly runs dry. To grow, these entities must issue either new equity or new debt. Rising interest rates raise the cost of both. If these pass-through entities have to tap capital markets, particularly for debt, their financing costs rise relative to their revenue and cash flow decreases, putting the indispensable dividend or distribution at risk,” adds ETF Daily News.
MLPs don’t make their money based on oil or gas prices. Unlike other energy sector stocks, MLPs primarily deal with the distribution and storage of energy products, so their business model is less reliant on the commodities market since MLPs profit off the quantity of oil and natural gas they are able to move around.
Vanguard REIT ETF
