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.
To KBWY’s credit, the ETF is up more than 4% over the past year while the largest traditional REIT ETF is lower by 7.2% over the same period, suggesting high-yield REITs have performed admirably in the facing of rising rates.
Related: Factors & Financial Planning
Higher interest rates are seen as punitive to REITs’ cash flow, which can hinder the company’s ability to boost dividends, the primary allure of the asset for many investors.
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.
“KBWY carries a five-star Morningstar rating and is up 36.8% over the past five years, topping the Dow Jones U.S. Real Estate Index by 460 basis points,” according to InvestorPlace.
For more information on real estate investment trusts, visit our REITs category.