Income-minded investors with a heavy tilt toward real estate investment trusts and related exchange traded funds do not need to worry too much about rising interest rates negatively affecting their REITs positions.
“REITs are more than just a fixed series of cash flows. They have some economic sensitivity that can cause them to rise when economic conditions improve, which is when rates usually rise,” according to an IndexIQ research note.
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.
Some investors fear REITs will act negatively in rising interest rate environment. The high dividends in REITs are attractive in a low-rate environment but are less enticing once safer Treasuries show higher rates.