Historically, December is a good month for the S&P 500, but there are also sector-level opportunities for investors to consider in the final month of the year. Data suggest the iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) is one of those ideas.
Although it is widely expected that the Federal Reserve will raise interest rates for the third time this year when the central bank meets in December, that is not keeping some investors from embracing rate-sensitive assets, such as real estate exchange traded funds.
“The IYR exchange-traded fund (ETF) has averaged a healthy December gain of 2.21% over the past 10 years, according to Schaeffer’s Senior Quantitative Analyst Rocky White — among the best of all ETFs that we track. Plus, the fund has ended the month higher 60% of the time, and rallied roughly 2.8% last December, despite the Fed hiking rates,” according to Schaeffer’s Investment Research.
Real estate investment trusts, or 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.
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Like other high-yielding asset classes, REITs are viewed as sensitive to interest rate increases. The Federal Reserve has boosted borrowing costs twice this year, with most recent coming in June, and many bond market observers believe a third rate hike will arrive before 2017 is over.
“IYR shares have been in a channel of higher lows and highs since their late 2016 bottom, muscling about 8% higher in the last year, with pullbacks contained by their 80-week moving average. The ETF was last seen 0.2% lower at $81.86, and just touched an annual high of $83 earlier this month. Another 2.21% rally from current levels would put IYR around $83.67 — deeper into new-high territory, and within striking distance of 2016’s all-time highs,” according to Schaeffer’s.
Another interesting catalyst could help IYR, which is one of the largest real estate ETFs, over the near-term.
“A short squeeze could also help IYR higher, should these bears abandon ship. Short interest surged nearly 20% in the last reporting period, and now represents about a week’s worth of pent-up buying demand, at the ETF’s average daily trading volume,” notes Schaeffer’s.
For more information on real estate investment trusts, visit our REITs category.