Another View on the REIT ETF Trade

A story usually has two sides. Investors in the Vanguard REIT ETF (NYSEArca: VNQ), the largest exchange traded fund holding real estate investment trusts (REITs), and rival real estate ETFs are hoping there are two sides to the REIT ETF story.

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 were previously among this year’s most popular income-generating asset classes. With many investors expecting a Fed rate hike as soon as next week, REITs’ popularity has waned, but that may also mean a buying opportunity is afoot.

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.

“The narrative right now is that the Fed’s pending rate hike is bad news for REITs, as it potentially raises their cost of capital. Adding to this anxiety is the spike in longer-term bond yields. See, higher bond yields hurt REITs in two ways,” according to ETF Daily News.

With the diminished desire for renters to turn into new homeowners, the residential REITs sector could continue to find support from renters as many face rising rents that could keep them from becoming buyers, especially if wages remain stagnant.