Real estate is one of the smallest sectors in the S&P 500 and it’s also one of the best-performing groups this year. Just look at the iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR), which entered Wednesday with a year-to-date gain of 26.46%.
Real estate investors also enjoy attractive dividend yield-generation, which provides an alternative to bonds as a source of income. The sector offers yields that exceed sovereign and corporate investment bonds. Unlike bond coupons, real estate dividends can grow over time, which is invaluable in periods of high growth and inflationary environments. Additionally, due to real estate’s long-term leases, they provide a more reliable source of dividends than other equities.
Amid declining Treasury yields and elevated equity market volatility, investors have been flocking to lower beta, defensive, high-yield REITs and the related ETFs, such as IYR. Rising interest rates may be the biggest risk since borrowing costs would rise along with rates and investors may turn to safer alternatives as well, but for now, rising rates are off the table.
“Underscoring this technical strength is data compiled by Schaeffer’s Senior Quantitative Analyst Rocky White, which shows 61% of the 41 stocks that we track under the ‘real estate investment trusts’ umbrella are trading above their 80-day moving average, boasting an average YTD return of 10.3%,” according to Schaeffer’s Investment Research.
Rocking With REITs
REITs are comprised of companies that own office towers, hotels, shopping malls and other commercial properties, offering investors exposure to the domestic economy and away from the uncertainty associated with the global supply chain, the Wall Street Journal reports.
Real estate uses a lot of borrowed money, but with the Fed’s pivot to cut rates, a key headwind from that asset class has been removed.
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Some marquee IYR holdings “sport a cumulative Schaeffer’s put/call open interest ratio (SOIR) of 3.23 — which shows short-term puts more than triple calls — and a short interest-to-float ratio of 4.37, pointing to plenty of potential buying power to fuel more gains for REIT stocks,” according to Schaeffer’s.
IYR, one of the largest REIT ETFs, invests in stocks issued by real estate investment trusts (REITs), companies that purchase office buildings, hotels, and other real property.
For more information on the market sectors, visit our sector ETFs category.