U.S. REIT (Real Estate Investment Trust) investments have been pretty solid in 2013, buoyed by strong demand for homes and surging confidence. Up until the middle part of May, securities in this space were pacing the broad market’s gains, adding about 14% YTD.
However, recent rumblings from the Federal Reserve and speculation over their bond buying program has rattled the U.S. REIT market. That is because REITs are very sensitive to any changes in interest rates, and the recent talk from the Fed has certainly influenced Treasury bond yields (read Medium Term Treasury Bond ETF Investing 101).
In fact, rates for benchmark 10 year American debt have moved from below 2.0% to briefly above 2.2% before settling Wednesday around the 2.1% level. While these are obviously still historically low rates, it does represent a huge increase in just a few weeks time, as rates were around the 1.6% mark to start the month of May.
Given this huge reversal, many investors are starting to reconsider REIT ETFs. This is especially true since the space—like many high dividend paying avenues-- was extremely bid up to begin the year, leading many to do some much needed profit taking in the space.
As a result of this perfect storm of higher rates, profit taking, and an uncertain outlook, REIT ETFs across the board have been hammered over the past five days. 7% losses were pretty routine in this corner of the market, compared to just a 1.2% loss for the S&P 500 in the same time frame, suggesting that REIT ETFs were easily leading the market lower (also see Utilities ETFs Slump on Downgrades).
Despite this horrendous sell off, investors should note that ETFs in this corner of the market are still solid performers when looking at the past six month time frame. Plus, their yields, which are in the 3.5% range, are sure to help dull the pain from any losses and volatility in the near term.
The real item that investors need to focus on now is the benchmark rates. Should Treasury bonds (for the Ten Year) continue to move higher or even approach the 2.5% mark, the sell-off seems likely to continue in the REIT ETF market.
However, should the Fed soothe investors’ concerns over a tapering off of bond purchases, REIT ETFs could recoup some of their recent losses, and move back higher. The space may also attract some bargain hunters after the incredible magnitude of the sell off lately, especially for those who missed the high dividend boat earlier this year (read 2 Forgotten REIT ETFs to Buy Now).
So while some profit taking was probably long overdue in this corner of the market, it is probably too early to panic about REIT ETFs. The reaction to just a hint of talk at reducing bond purchases is certainly troubling, but given the solid yield and the booming trends in the real estate market, the space could have a bit more room to run once the sell off bottoms out, and high dividend stocks come back into focus.
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