Yield hunters typically dump real estate investment trusts and sector-related exchange traded funds when interest rates rise, but REITs may do well in a growing economic environment that is also comes with higher interest rates.
Similar to other high-dividend payers, REITs are sensitive to rising interest rates since their yields look relatively less attractive to safer fixed-income alternatives. However, during a rising interest rate environment, the economy is typically expanding, so REITs may do well for another reason.
“If interest rates are going up because the economy is improving, that can be positive for REITs because landlords can raise rents to cover the rate increases,” Brian Cordes, a senior vice president at Cohen & Steers, told CNBC, projecting the U.S. economy to grow by 2.9% this year. “We see the recent pullback as an attractive entry point to the asset class.”
REITs have recently pulled back in light of the recent Federal Reserve rate hike speculations. Consequently, investors may find that this segment of the market looks cheaper than they use to. Year-to-date, the Vanguard REIT ETF (NYSEArca: VNQ) fell 5.0%, iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) dropped 3.7% and Schwab US REIT ETF (NYSEArca: SCHH) declined 3.6%.