As was widely expected, the Federal Reserve boosted interest rates last week for the first time this year.
With the jobs market strong and other economic data points signaling a robust U.S. economy, the Fed is targeting three rate hikes for 2017, which some investors view as a negative for rate-sensitive asset classes.
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.
REITs are securities that trade like a stock and invest in real estate directly through property ownership or mortgages. Consequently, revenue are mainly generated through rents or interest on mortgage loans. To qualify for special tax considerations, the asset also distributes the majority of income, about 90% of taxable profits, to investors as dividends.
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.