The housing market is already feeling the pangs of rising interest rates crimping homebuyer enthusiasm to take on financing to purchase real estate, but these three ETFs are defying the wave of rate hikes put forth by the Federal Reserve with their focus on real estate investment trusts (REITs), such as the Schwab US REIT ETF (NYSEArca: SCHH), iShares US Real Estate ETF (NYSEArca: IYR) and Vanguard Real Estate ETF (NYSEArca: VNQ).
ETFs that focus on REITs provide investors exposure and easy accessibility to the real estate sector as opposed to investing directly in real property itself and the potential issues that go with it, including landlord-tenant duties, performing renovations if necessary and property maintenance. With the recent rate hike of the federal funds rate by 25 basis points, investors fretting about the increasing cost to borrow money don’t have to worry about financing with REIT investments.
Despite the increase in rates in 2018, here are three ETFs that have been able to generate returns and ones investors should consider when it comes to screening for REIT-focused funds.
1. Schwab US REIT ETF (NYSEArca: SCHH)–5.44% Year-to-Date
SCHH seeks to track as closely as possible the total return of the Dow Jones U.S. Select REIT IndexTM. The fund invests in securities included in the index, which is a float-adjusted market capitalization weighted index comprised of REITs.
2. iShares US Real Estate ETF (NYSEArca: IYR)–4.54% Year-to-Date
IYR seeks to track the investment results of the Dow Jones U.S. Real Estate Index and generally invests in securities of the underlying index and in depositary receipts representing securities of the underlying index. The index measures the performance of the real estate sector of the U.S. equity market and may include large-, mid- or small-capitalization companies.
3. Vanguard Real Estate ETF (NYSEArca: VNQ)–3.21% Year-to-Date
VNQ seeks to provide a high level of income and moderate long-term capital appreciation by tracking the performance of the MSCI US Investable Market Real Estate 25/50 Index that measures the performance of publicly traded equity REITs and other real estate-related investments. VNQ attempts to track the index by investing either directly or indirectly in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
Tariffs Hurting Homebuilder ETFs
Despite a new North American Free Trade Agreement established between the U.S., Canada and Mexico, lingering issues still exist in the U.S.-China trade disputes, which will increase the cost of homebuilding and thus, affect homebuilder ETFs like the iShares US Home Construction ETF (BATS: ITB), SPDR S&P Homebuilders ETF (NYSEArca: XHB) and the Invesco Dynamic Building & Construction ETF (NYSEArca: PKB).
Tariffs have already elevated the costs of construction–materials like lumber, steel and aluminum as well as U.S. tariffs on $200 billion in Chinese imports like countertops and furniture could increase construction costs 20% to 30%.Existing homeowners wishing to perform renovations will also feel the proverbial pain in their pockets. As such, they will seek ways to curb costs or even abandon plans for renovations altogether.
In the latest tariff-for-tariff war, U.S. President Donald Trump moved forward with imposing a 10% tariff on $200 billion worth of Chinese goods that includes a step-up increase to 25% by the end of the year. The new round of U.S. tariffs on 10% of Chinese goods signals that the U.S. won’t relent on the application of pressure to force China’s hand in making a deal when actual negotiations materialize.