With investors piling into bonds, safe haven Treasury notes have been offering yields that are scraping the bottom of the barrel, but the recent uptick in stocks is causing yields to rise once again. Will this hurt real estate ETFs in the long run?
Real estate investment trusts (REITs), in particular, offer investors a fixed income component by offering dividends to investors. With yields rising, however, this could put government debt in competition with REITS.
“For the first four trading days of November, the Bloomberg Barclays U.S. Aggregate Index had a total return of negative 0.50%,” wrote John Coumarianos in Barron’s. “That’s a big move for investors, given that the bond index has an annual yield of 2.2%, but it is also significant for real-estate investment trusts.”
“Most indexes of so-called property REITs were down about 3.7% over the same period, even though the S&P 500 was up 1.3%,” Coumarianos added. “REITs don’t pay income tax, but they have to pass 90% of their net earnings through to investors in the form of dividends, so they are popular with people who are seeking yield. That puts them in competition with Treasuries and other bonds.”
The Differentiator with REITs
While Treasury notes may compete with respect to rates, the differentiator is that REITs will give investors exposure to alternative assets like real estate. REITs give investors real estate exposure without having to actually own the real assets themselves—thus, avoiding headaches, such as becoming a landlord.
Investors who do want a piece of the real estate action can still do so through funds like the Vanguard Real Estate ETF (NYSEArca: VNQ). VNQ seeks to provide a high level of income and moderate long-term capital appreciation by tracking the performance of the MSCI US Investable Market Real Estate 25/50 Index that measures the performance of publicly traded equity REITs and other real estate-related investments.
Investors can also obtain commercial real estate exposure via the NETLease Corporate Real Estate ETF (NYSEArca: NETL). The NETL ETF is uniquely focused solely on Net Lease Real Estate Investment Trusts (REITs), which is one of the fastest-growing sectors within the REIT space.
This pure-play Net Lease REIT ETF encompasses a variety of REITs that provide sustainable cash flows by leasing their properties through long-term contractual leases on a triple-net lease basis. The leases have terms that are generally 10 years or longer, predetermined rental rate increases, and minimal landlord responsibilities.
For more market trends, visit ETF Trends.