Falling Rates Help Lift Real Estate Investment Trusts

By Tom Lydon, ETF Trends

Real estate investment trust-related exchange traded funds have been steadily strengthening over the past week as a falling Treasury yields push investors back into more attractive income-generating assets.

Over the past week, the Vanguard REIT ETF (VNQ) has increased 2.3%.  Year-to-date, VNQ is up 16.6%.

Supporting the bounce back in REITs, falling interest rates have contributed to the recovery in yield-generating assets. Specifically, the benchmark 10-year Treasury yield has declined to 2.31% from 2.63% in mid-September.

Treasury yields are edging lower due to global economic growth concerns. Specifically, investors grew wary after the International Monetary Fund cut its global growth forecast for the year, Reuters reports.

“Rising interest rates are still the REIT sector’s greatest potential headwind,” according to Morningstar analyst Abby Woodman. “Because REITs must pay out most of their income as dividends, they rely on debt for growth. For REITs, higher rates mean more-expensive debt servicing and less business reinvestment.”

Brad Case, senior vice president for research and industry information at NAREIT, also argues interest rate concerns contributed to the selling in the REITs space over September, reports Erika Morphy for GlobeSt.

However, REIT assets become more attractive when yields on other fixed-income assets are pushed down. For instance, VNQ shows a 3.51% 12-month yield.

Additionally, the riskier mortgage-backed real estate investment trusts have some of the most attractive yields, with iShares Mortgage Real Estate Capped ETF (REM) showing a 13.42% 12-month yield.

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Vanguard REIT ETF (VNQ) and  iShares Mortgage Real Estate Capped ETF (REM) are components of the D2 Capital Management Multi-Asset Income Portfolio.  Current yield on the portfolio is 4.95% and year to date the portfolio is up 4.63% (as of 10 October 2014).

Disclosure:  I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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