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.
“The S&P 500 real estate sector has been the market’s worst performer since its launch in September, and these high dividend-yielding names could see more difficulty ahead if rates move even higher. The sector is down 10 percent since its first day as an official sector, while the S&P has gained nearly 2 percent in the same time,” reports CNBC.
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.
“JPMorgan earlier this year forecasted that the sector would see inflows of as much as $100 billion upon its creation. Just before the sector’s debut, some market watchers were skeptical of the group continuing its gains,” according to CNBC.
For more information on real estate investment trusts, visit our REITs category.