Rising Bond Yields May Spell Opportunity With This REIT ETF

Real estate investment trusts (REITs) and the related ETFs have been stout performers this year due in large part to declining Treasury yields in the U.S. Last week, bond prices dipped, sending yields higher while weighing on REIT funds.

The FlexShares Global Quality Real Estate Index Fund (NYSEArca: GQRE) wasn’t immune to last week’s pressure on REIT assets, but the fund can still offer opportunity even amid rising bond yields.

GQRE targets the Northern Trust Global Quality Real Estate Index, a fundamentally-weighted index that focuses on commercial and residential REITs. Mortgage REITs, real estate finance companies, mortgage brokers and bankers, commercial and residential real estate brokers, and real estate agents and home builders are among the securities excluded from the index.

As its name implies, GQRE is a global fund, indicating it’s not entirely reliant on domestic bond yields to drive performance. Markets outside the U.S. account for almost 41% of GQRE’s geographic profile.

Get With GQRE

“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,” reports John Coumarianos for Barron’s. “That puts them in competition with Treasuries and other bonds.”

GQRE also features significant ex-US exposure, a trait that should serve the fund as a slew of central banks besides the Federal Reserve consider lowering interest rates. While REITs are trading at the higher end of historical valuation ranges, the group is generating robust cash to support dividend hikes.

GQRE also offers some avenues for growth because the fund allocates 58% of its weight to mid- and small-cap stocks. Most traditional REIT ETFs are large-cap heavy. Additionally, REITs, broadly speaking, are healthier today than they have been in years.

“REITs are healthier now than they were before the financial crisis. They tend to have reasonable amounts of debt, and can cover their dividends with cash flow. Many landlords, including those that own apartments, self-storage, and industrial properties, have been able to push rents higher,” according to Barron’s.

For more information on the real estate investment trusts segment, visit our REITs category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.