Income-seeking investors have widely embraced exchange traded funds tracking real estate investment trusts (REITs) for the above-average yields and reduced correlations to traditional assets, such as equities and bonds. Those investors can boost their income with some focused REIT funds, including the PowerShares KBW Premium Yield Equity REIT Portfolio (NYSEArca:KBWY).
KBWY follows the KBW Nasdaq Premium Yield Equity REIT Index, which uses a yield-weighted methodology.
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.
Regarding KBWY, “investors should also note that this real estate ETF focuses on small- and mid-cap stocks. The average market value of the fund’s 30 holdings in $1.9 billion, putting it in small-cap territory,” reports InvestorPlace.
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.
Consequently, when rates and yields rise, REITs are sold off on expectations of higher costs for financing real estate acquisitions, and their dividends become less attractive against less risky Treasuries.