Out on its Own, Real Estate Sector Struggles

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 among the most popular income-generating asset classes earlier this year.

Additionally, funds such as the Vanguard REIT ETF (NYSEArca: VNQ), the largest exchange traded fund holding real estate investment trusts (REITs), and rival real estate ETFs, surged in anticipation of real estate becoming the 11th S&P 500 sector.

However, things have not been going well for real estate stocks since their separation from the financial services sector.

In addition to VNQ, the 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.

When S&P Dow Jones Indices and MSCI announced they would create an independent real estate sector, J.P. Morgan projected that active equity funds were so underweight toward REITs that the new sector could cause $100 billion flows to the category. Since the newly minted sector would rival in size to utilities, telecoms and materials sectors, a number of fund managers who have not included REITs exposure may eventually bulk up on real estate equities.