With interest rates rising in the U.S., the real estate sector is lagging this year. Real estate stocks, including real estate investment trusts (REITs) and the related exchange traded funds, are viewed as rate-sensitive assets.
Investors may want to consider a more global approach to the real estate sector with the iShares Global REIT ETF (NYSEARCA: REET). REET, which is nearly four years old, tracks the FTSE EPRA/NAREIT Global REIT Index and holds 292 stocks.
“Regardless of what lies ahead, rents have been rising in line with economic growth and inflation, and with limited new supply in many markets and increasing occupancy levels, the industrial, residential and diversified property sectors have performed strongly over the past year,” according to FTSE Russell research.
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.
Related: US Home Prices Rise: Time to Invest in REITs?
Going Global for REITs
REET allocates 60.72% of its weight to U.S. REITs, but more than 10 other countries are represented in the fund. Most of those countries are unlikely to raise interest rates this year.
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. REET has a trailing 12-month dividend yield of 4.06%.
“Industrial property was the strongest developed market property sector in 2017 and continued to lead the other sectors in the first quarter of 2018 with a total return of 20% in US dollar terms over the 12 months ended March 30, 2018,” said FTSE Russell. “Demand for industrial property has increased thanks to the boom in e-commerce. While the rise of e-commerce has hurt retail, online retailers that need a physical presence to drive sales and create distribution hubs are fueling the demand for industrial properties.”
REET allocates almost 10.1% of its weight to industrial REITs. Retail REITs are the fund’s largest industry exposure at 25.59%.
For more information on real estate investment trusts, visit our REITs category.