REITs: Attractive Yields in a Low-Rate Environment

By Tom Lydon, ETF Trends

Despite fears of a rising rate environment, interest rates remain stubbornly low. Investors who believe rates will remain subdued going into the new year can utilize a broad real estate investment trust exchange traded fund to generate some extra income.

The Vanguard REIT ETF (VNQ), with a 3.13% 12-month yield, provides a cheap and decent way to track the broad REITs market.

“Right now, Morningstar’s equity analysts believe that the U.S. REIT sector as a whole is slightly overvalued,” according to Morningstar analyst Robert Goldsborough. “However, our analysts also see pockets of opportunity in certain areas of the REIT landscape, including health care, retail, and cell tower properties.”

For instance, VNQ includes a 13.5% weight toward health care REITs and 25.9% in retail REITs.

Along with its diversified sub-sector exposure, VNQ includes a relatively spread out market capitalizations, including 43.4% large-caps, 34.3% mid-caps, 19.0% small-caps and 3.3% micro-caps.

REITs provide a liquid alternative to owning physical commercial real estate properties. REITs investments also share similar attributes with stocks and bonds. Since REITs are required to distribute at least 90% of their income from rent payments to investors, these real estate investments can generate attractive yields.

Potential investors should not mistake REITs as an alternative to traditional fixed-income assets like Treasuries. The REITs asset class has been 41% more volatile than the S&P 500 over the past three years and 5.5 times more volatile than the U.S. bond market.

“Potential near-term risks include slower-than-projected growth, setbacks in the U.S. economy, and rising interest rates,” Goldsborough added.

Rising rates raise REITs’ debt financing costs. However, a flat interest rate outlook would benefit REITs in an expanding economic environment as rising rents and property prices would support the asset class.

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Vanguard REIT ETF (VNQ) is a component of the D2 Capital Management Multi-Asset Income Portfolio. Current yield on the portfolio is 5.01% and year to date the portfolio is up 7.77% (as of 5 December 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.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.