History has demonstrated that the performance of equities can be a mixed bag during periods of rising interest rates, emphasizing the need for a diversified portfolio.
Fed officials decided yesterday to raise the benchmark federal-funds rate by a quarter percentage point to a range between 0.25% and 0.5% from near zero. Most of the Fed officials projected pushing it up to at least pre-pandemic levels, which would be consistent with raising interest rates at every scheduled meeting this year.
Rising rates can have a disproportionate effect on certain market sectors. While growth stocks haven’t been consistently worse performers than value stocks during periods of rising rates, they’ve been hit particularly hard during the recent spike in interest rates due to their substantially higher valuations at the outset of recent market volatility.
Value-oriented stocks and ETFs have held their ground so far this year while the broad market has fallen, which is a sharp diversion from trends in recent years.
Investing in the real estate sector offers the potential to add diversification, growth, and income, according to FlexShares. A well-diversified and global approach to real estate investing can serve as a key factor in unlocking the full range of these potential benefits.
The FlexShares Global Quality Real Estate Index Fund (GQRE) tracks a proprietary index that assesses real estate investments based on quality, momentum, and value. The index weights its holdings based on how well they score on those factors, then imposes caps to ensure diversification.
GQRE invests in real estate companies in developed U.S. and international markets, including real estate investment trusts and real estate operating companies.
FlexShares’ research suggests that real estate equities have been used traditionally as a potential hedge against long-term inflation, as some types of real estate stocks have been shown to be less resistant to rising interest rates. Historically, real estate investments also have paid higher dividend yields than other equity classes, offering an alternative source of potential income.
Real estate historically has had a low correlation to both fixed income and other equity asset classes, adding further diversification to an already well-diversified portfolio.
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