Real estate stocks, including real estate investment trusts (REITs) and the related exchange traded funds, are viewed as rate-sensitive assets.
With interest rates set to rise, income investors are understandably concerned about the potentially negative effect of higher borrowing costs on their rate-sensitive assets, but real estate investment trusts and related ETFs may be seen as an alternative income opportunity for yield-minded investors.
However, ETFs such as the NuShares Short-Term REIT ETF (Cboe: NURE) remain solid options for income investors. NURE is comprised of real estate investment trusts that invest in residential or commercial real estate with a shorter-than-average lease duration than REITs investing in other sectors.
“NURE is designed to provide exposure to REITs with shorter leases such as Hotel REITs, Apartment REITs, Storage Facility REITs and Manufactured Home REITs,” said Martin Kremenstein, Head of NuShares, Nuveen’s ETF business, said in an interview with ETF Trends. “Historically, these segments of the REIT universe have outperformed the broader REIT universe with lower risk and a comparable yield.”
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.
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.
“REITs with shorter leases tend to outperform during periods of rising interest rates due to their ability to take advantage of improving economic conditions by adjusting pricing more frequently as lease terms expire and are renewed,” said Kremenstein.
NURE, which tracks the Dow Jones U.S. Select Short-Term REIT Index, has a 30-day SEC yield of 3.37%. The ETF allocates 46.1% of its weight to apartment REITs and 28.8% to hotel REITs. Self-storage REITs account for 16.3% of NURE’s roster. NURE has 37 holdings.
Year-to-date, as of 2/15, the yield on the 10-year Treasury has moved from 2.46% to 2.90. During this period, the index underlying NURE has outperformed the broader REIT market as represented by the Dow Jones US Select REIT Index by more than 200 basis points, according to Kremenstein.
For more information on real estate investment trusts, visit our REITs category.