Even if interest rates rise, the improved economic outlook and strength in the commercial sectors could reinforce real estate investment trusts and related exchange traded funds.
Over the past year, Vanguard REIT ETF (VNQ) rose 31.4%, iShares Dow Jones US Real Estate Index Fund (IYR) gained 27.4% and SPDR Dow Jones REIT ETF RWR) increased 32.6%.
Fund managers argue that while the real-estate funds may experience short-term swings due to interest rate changes, the funds’ underlying outlook remains positive, pointing to a growing U.S. economy, improving employment rate and greater foreign investment demand for U.S. REITs, reports Tom Lauricella for the Wall Street Journal.
“Real-estate fundamentals are pretty solid,” David Wharmby, global head of real-estate securities at Cornerstone Real Estate Advisers, said in the WSJ article.
Nevertheless, the recent outperformance of the REITs space has been fueled by the unexpected rally in U.S. debt, which has made real estate assets a more attractive yield-generating alternative. For instance, VNQ has a 3.37% 12-month yield, IYR has a 3.47% 12-month yield and RWR has a 2.87% 12-month yield. REITs are required to pay out 90% of their taxable income to shareholders to capitalize on tax benefits.
Samuel Wald, manager of Fidelity Advisor Real Estate, argues that short-term traders will act on interest rate moves, but the long-term outlook is more stable. Specifically, Wharmby points out that it is currently a landlord’s market as long as the economy continues to grow. John Wenker, a co-manager of the Nuveen Real Estate Securities Strategy, also believes that the general profit outlook for real-estate companies is very positive, compared to the broader equity market.
“The underlying real estate is a much more slow-moving asset than what goes on in Wall Street,” Wald said. “We like to say that REITs act like stocks in the short run, but act like real estate in the long run.”
While REIT investors may expect some short-term volatility, following a knee-jerk reaction to rising rates, the REITs space could continue to strengthen, along with an expanding economy.
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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 5.57% and year to date the portfolio is up 1.34% compared to the S&P 500 which is up 0.62% (as of 10 February 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.
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