The Federal Reserve is widely anticipated to raise its benchmark rates on Wednesday, but some believe the U.S. will still be stuck in relatively low-rate environment for an extended period.
Consequently, income-minded investors may still find attractive opportunities to generate extra yields in investments like real estate investment trusts and related exchange traded funds.
“Given that yields remain below historical averages and will continue to be so for the foreseeable future, investors will need to continue to look outside traditional fixed income benchmarks and take a dynamic approach to insulate against the impact of rising rates,” Martin Kremenstein, Head of NuShares, said in a note.
Fixed-income investors are closely watching the Fed ahead of the upcoming March meeting, with fed funds futures traders betting on a 94% chance of a 25 basis point rate hike to 1.75%. While many anticipate the Fed to continue to raise rates, the central bank will likely take it slow and steady, which may leave us with a prolonged yield environment for income-minded investors.
Consequently, Kremenstein argued that investors should look outside the benchmark towards dividend paying equities and REITs that may offer the opportunity to increase income, but investors should keep in mind that these riskier income plays may be accompanied by higher risk.
Kremenstein, though, advised investors to evaluate the investments based on desired income level with a focus on volatility and duration to limit potential risks. Specifically, he pointed to short-term REIT ETFs as they have historically experienced less volatility during times of rising rates.
For example, the NuShares Short-Term REIT ETF (BATS: NURE) is comprised of real estate investment trusts that invest in residential or commercial real estate with a shorter-than-average lease duration than REITs investing in other sectors.
These types of shorter-term REITs may be a good way for income-minded investors access yield generation in a rising rate environment as short-term contracts allow businesses to more quickly reprice and adapt to changing market environments. Due to the REITs structure that allows the majority of revenue to be distributed as income to shareholders, businesses’ prudent reactions could translate to higher returns for investors. NURE shows a 3.78% distribution yield.
For more information on real estate investment trusts, visit our REITs category.