Investors Dump REIT ETFs As Interest Rates Rise

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August 26, 2013 12:39pm NYSE:ICF NYSE:IYR

percent rateIt has been a brutal month in the REIT world as rising rates have crushed these high yielders. Prices for many in this space have slumped by more than 10% in the time frame, easily underperforming other high yield stocks, as well as several longer

dated bonds as well.

This trend has stayed intact as rates for benchmark 10 year government debt crossed the 2.9% mark, putting the three percent level—a mark unimaginable six months ago– in sight. And while the prospect of the Fed tapering looking pretty likely, investors could see further losses in the REIT corner of the market if yields do hit this lofty mark (see Bet Against Real Estate with These Short REIT ETFs).

Yet while the trend has certainly been poor for REITs lately, Tuesday’s trading did offer up some good news finally. Global markets tumbled pretty much around the world leading to a flight to quality.

This helped to boost precious metals on the day, but the real focus was again on the Treasury market. Global investors seemingly piled into U.S. government debt pushing down rates close to the 2.8% level.

As you can imagine, REIT investors rallied around this news pushing this sector higher on the day. In fact, besides some continued strength in the commodity space—specifically in the miners—REITs were actually leading for the session.

ETF Options

For broad exposure to the REIT market, investors can look to any number of REIT ETFs currently on the market. These have been crushed lately, but if these trends continue may be decent short term picks, assuming rates continue to consolidate.

Below, we highlight four of the most popular products in the space for those who want a little more information on this in-focus space:

Vanguard REIT ETF (VNQ)

This is easily the most popular REIT ETF on the market with $16.6 billion in assets under management. The ETF is also a cheap choice as costs come in at just 10 basis points a year for this product.

In total, the product holds about 125 REITs in its basket, with a roughly equal breakdown between large caps and then everything else. Specialized REITs take the top spot (28.8%), followed by retail REITs (27.7%) and then residential REITs (16.7%).

The ETF was up 2.5% for the session, though the product is still down 10.2% over the past one month time frame. Still, the annual yield remains robust at 3.9% for VNQ.

iShares U.S. Real Estate ETF (IYR)

This product is also a popular choice in the REIT market, as volume is usually above 11 million shares a day. IYR is a bit pricier than its counterpart though, as costs come in at 46 basis points a year (see The Comprehensive Guide to REIT ETFs).

Total holdings come in just below 100 securities, though the product does a solid job of spreading out assets, as just under 40% are in the top ten. Specialty REITs again take the top spot (just under 30%), while retail and industrial round out the top three at just about 20% each.

This ETF added about 2.8% in Tuesday trading, while its one month loss comes in at 9.7%. The product does pay out a little less in yield though, coming in at 3.9% in 30-Day SEC terms and 3.8% for a 12 month yield look.

iShares Cohen & Steers REIT ETF (ICF)

For another iShares look at the REIT market, investors have ICF. This product tracks the Cohen & Steers Realty Major Index, a benchmark of just 30 REITs charging investors 35 basis points a year in fees for the exposure.

This product is heavily focused on large cap securities, as just one-third of the total is devoted to mid caps or smaller. Top individual holdings include Simon Property Group (SPG), Public Storage (PSA), and HCP Inc. (HCP), and these three combine to account for 21.8% of the total.

ICF is up roughly 2.4% in Tuesday trading, though it is still down 10.8% in the trailing one month time frame. In terms of yield, both the 30-Day SEC Yield and the 12-month yield come in around the 3.0% mark.

DJ Wilshire REIT ETF (RWR)

SPDR’s entrant in the real estate market is also quite popular as more than $2 billion is invested in the product while average daily volume comes in at roughly 200,000 shares a day. This product, which follows the Dow Jones U.S. Select REIT Index, is also a cheap choice, charging investors just 25 basis points a year in fees.

Once again this is a large cap focused product with small and mid caps making up roughly 45% of the assets. Top sectors go towards regional malls, apartments, and healthcare, all of which make up at least 14.6% of assets.

The ETF added roughly 2.5% in Tuesday trading, though it has lost about 10.4% in the past month. For yield, this fund is currently sporting a 3.4% 30-Day SEC payout, while the annual payout comes in at 3.3%.

Bottom Line

A rising rate environment has been terrible news for REIT ETFs, pushing many down in recent weeks. Investors are clearly thinking twice about the space given the rising expectations for tapering, and concerns over housing in general with higher rates (see 3 ETFs for Rising Interest Rates).

While this has been largely the trend as of late, REIT investors received a temporary respite from the poor trading in Tuesday’s session. REIT ETFs surged on this day as global markets retreated, and U.S. yields followed.

Although it is unclear if this can continue—especially with tapering pressures—it is good to see REITs finally having a solid trading session, in what has otherwise been a pretty rough period for this once-loved sector.

This article is brought to you courtesy of Eric Dutram.

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