Real Estate Investment Trusts Keep Rocketing Higher

By Tom Lydon, ETF Trends

Aided by a significant drop by 10-year Treasury yield, real estate investment trust (REIT) funds were among 2014’s top performing sectors and that trend is continuing this year as income investors continue the hunt for yield.

The Bloomberg REIT Index is nearing its record high set almost eight years ago. So is the MSCI REIT Index, the benchmark for the Vanguard REIT ETF (NYSEArca: VNQ), the largest U.S. REIT exchange traded fund.

“The Bloomberg index’s dividend yield as of yesterday was 3.38 percent, or a full percentage point greater than the yield on the Treasury’s 30-year bond. The gap exceeded 1 point last week for the first time since June 2012, according to data compiled by Bloomberg. The MSCI index had an even higher yield, 3.53 percent,” writes David Wilson for Bloomberg.

VNQ gained 30.4% last year, about double the gains for the benchmark financial services index, on its way to collecting $4.76 billion in new assets. VNQ is up nearly 7% in 2015.

Investors’ affinity for REIT has not dampened in 2015 as VNQ has added over $439 million in new assets.

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.

Some may be concerned that REITs are sensitive to changes in interest rates. Notably, the fall in interest rates have made the asset more attractive as a yield-generating alternative, but some fear the asset will fall out of favor once rates rise.

Nevertheless, many analysts argue that REIT shares will continue to perform, despite rate risks, since interest rates alone don’t dictate REIT performance and other factors may override rate concerns. For example, a strong economy and greater mergers-and-acquisitions activity could outweigh rate fears.

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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 5.51% and year to date the portfolio is up 0.44%, compared to the S&P 500 which is down 1.20% (as of 21 January 2015).

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.