With Interest Rates Set to Rise, It's Not All Bad News for REIT ETFs

With interest rates set to rise, perhaps as soon as this week, income investors are understandably concerned about the potentially erosive effect of higher borrowing costs on rate-sensitive assets and sectors, including real estate investment trusts (REITs) and the corresponding exchange traded funds.

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.

For example, the Vanguard REIT ETF (NYSEArca: VNQ), the largest REIT ETF, and rival REIT funds have been struggling this month.

REITs typically perform poorly in a rising rate environment since many investors see the asset as a proxy for bonds when fixed-income returns weaken, reports Rodrigo Campos for Reuters.