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.
“IYR has trailed the broader S&P 500 over the last year, making the real estate ETF a relatively cheap option for investors looking to capitalize on a value play, said Matt Schreiber, president and chief investment strategist at WBI Investments. That and the search for higher yields is why his firm now owns almost 30,000 shares of the fund,” according to Bloomberg.
REITs provide diversification benefits as the asset shows a lower correlation to stocks and bonds. However, the asset category has recently experienced heightened volatility due to interest rate risks. 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.
Real estate “is the best performer in the S&P 500 Index over the past month, gaining more than 4 percent and handily outpacing the broader market,” according to Bloomberg.
For more information on real estate investment trusts, visit our REITs category.