On a historical basis, real estate stocks and the related exchange traded funds are inversely correlated to rising interest rates. That scenario is on display again this year as big real estate ETFs, including the iShares US Real Estate ETF (NYSEArca: IYR), are lagging the broad market by significant margins.
IYR, one of the largest ETFs focusing on real estate investment trusts (REITs), is down more than 4% over the past month, a period that includes the Federal Reserve’s third interest rate hike of 2018. The Fed is expected to raise rates again in December and several times next year.
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.
“The $3.8 billion iShares U.S. Real Estate ETF, or IYR, is on pace this week for the most outflows in a year. The fund has lost assets for five straight sessions, with $530 million leaving between Monday and Wednesday. It went through a similar experience early last October, after 10-year Treasury yields jumped more than 30 basis points in four weeks,” according to Bloomberg.
Dealing With Fed Tightening
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.
Related: 10-Year Treasury Yield Hits 7-Year High
Fixed-income investors worry about the negative effects of inflation on their real yields, but some may consider real estate as an alternative yield-generating option to hedge against inflationary pressures and potentially generate attractive returns and growth in the environment ahead.
“Better-than-expected employment and U.S. services data alongside hawkish comments from Federal Reserve Chairman Jerome Powell helped lift Treasury yields Wednesday. The 10-year note surged to around 3.2 percent, the highest since 2011, while the 30-year rose to its highest level since 2014 and the two-year popped to a pre-crisis high,” reports Bloomberg.
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