Real estate stocks, including real estate investment trusts (REITs), and the relevant exchange traded funds are believed to be solid performers in the seventh month of the year, but this year, the iShares Dow Jones US Real Estate Index Fund (NYSEArca:IYR) and the Vanguard REIT ETF (NYSEArca:VNQ), the largest REIT ETF, are struggling to start July.
In the case of IYR, that REIT ETF is lower by almost 2.1% over the past week. 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.
IYR “has had a choppy 2017. After hitting a year-to-date peak of $81.94 on June 26, the exchange-traded fund (ETF) pulled back to a trendline that’s connected a series of higher lows since December, and were last seen trading at $77.81. This area also coincides with a 38.2% Fibonacci retracement of IYR’s 2016 rally — while just below sits the fund’s year-to-date breakeven level of $76.94 — and could help support the shares,” according to Schaeffer’s Investment Research.
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.
Related: The 5 Best Performing ETFs of 2017
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.
“Also working in IYR’s favor is the fund’s historically bullish performance during the month of July. According to data from Schaeffer’s Quantitative Analyst Chris Prybal, IYR has averaged a July gain of 2.3% since its inception — second only to April in terms of its best monthly showing. Plus, data from Schaeffer’s Senior Quantitative Analyst Rocky White shows IYR has been one of the best ETFs to own in July, averaging a 2.5% monthly return over the past decade, and boasting an 80% win rate,” reports Schaeffer’s.
For more information on real estate investment trusts, visit our REITs category.