A Contrarian Catalyst for Real Estate ETFs

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 spent significant time in 2016’s early stages as a preferred income-generating destination.

However, that theme evaporated amid concerns that real estates were stocks overvalued and as the Federal Reserve approached its first interest rate hike of the year, which was delivered last month. With the Fed targeting three rate hikes this year, popular REIT ETFs such as the iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) and the Vanguard REIT ETF (NYSEArca: VNQ), the largest REIT ETF, were pinched.

Enthusiasm for REITs also waned after real estate became the 11th S&P 500 sector last year, separating from financial services. Now, some market observers believe the sector is under-owned and could offer rebound potential this year for income investors.

“Real estate, which was broken out of the financials at the end of the summer to create an 11th distinct sector, is the most underweighted sector by active managers, according to research from Bank of America Merrill Lynch,” reports CNBC.