At the beginning of last week, escalating tensions between Russia and Ukraine led to a huge rush into Treasury bonds, pushing benchmark U.S. rates down to 2.6%, a level that was within striking distance of the 2014 low. And although markets were depressed on the news, this slump in rates was certainly good for companies in rate sensitive segments which are heavily dependent on low rates to power their gains.
However, now that tensions have cooled (to an extent) in Eastern Europe and with a solid jobs report back home, there was less reason to need safety, causing many investors to flee Treasury bonds once more. Thanks to this, the 10-year has moved nearly 20 basis points higher in the tail end of the week, pushing rates back to a level not seen since late January (see 3 ETFs for Rising Interest Rates).
The quick rise in rates, along with a fear of more QE reductions in short order, could spell disaster for rate sensitive sectors such as real estate. This may be especially true if rates continue in this path back towards their 52 week high just over the 3.0% mark.
Still, real estate ETFs are doing quite well from a year-to-date look, as many are still sporting gains just under the double digit threshold. But if rates continue to make their ascent back towards the three percent mark, the following real estate ETFs could definitely be ones to watch, and also great barometers of how rate sensitive sectors are performing in this market environment:
Vanguard REIT ETF
This is easily the most popular REIT ETF in the market today, holding close to $21 billion in AUM and seeing volume approaching 3.3 million shares a day. The product is an ultra cheap choice too, charging just 10 basis points a year in fees.
This cap weighted fund holds about 130 REITs in its basket, giving a big weight to Simon Property Group followed by decent sized weights to Public Storage (PSA) and Prologis (PLD) to round out the top three. The fund does have a large cap focus, though mid caps (35%), and small caps (20%), do make up a sizable portion as well (see all the Real Estate ETFs here).
This fund has moved higher by over 10% since the start of 2014, though in the past two weeks, as the S&P 500 has moved higher by about 2.2%, while this product has gained just 0.8% in comparison.
iShares Dow Jones US Real Estate Index Fund
This fund may not have the same AUM level as VNQ, but it is very popular among traders, as more than 10 million shares move hands on a daily basis. However, the fund is a bit pricier with a cost of 46 basis points a year for following the Dow Jones US Real Estate Index.
SPG again takes the top spot in this fund, though the rest of the top three is filled up by American Tower (AMT), and Crown Castle International (CCI). This fund has a large cap focus too, though it is a bit more skewed towards mid caps as these make up about 40% of the ETF’s basket.
This ETF pays a 30-Day SEC Yield of 3.7% and it has added about 9.3% in the YTD time frame, though recent trading has been choppy and it has underperformed the S&P 500 in the past 10 days adding just 0.5% (read Rising ETFs with Double-Digit Yields).
SPDR Dow Jones REIT ETF
For a slightly more concentrated approach to U.S. REIT investing, investors have RWR from State Street. This fund has over $2.3 billion in assets, charges 25 basis points in fees, and holds about 90 stocks in its basket.
SPG takes up roughly 10.8% in this fund, while much like VNQ, PSA and PLD round out the top three holdings. This fund has a slightly heavier focus on large cap stocks, though mid caps make up roughly a third of the portfolio while small caps take up the remainder at around 14% of the total.
This fund, which pays a 30-Day SEC yield of about 3.2%, has moved higher by about 10.3% since the start of the year, though in the trailing 10 day time frame it has gained just 0.7%.
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