Given rounds of concerns over renewed U.S.-Sino trade tensions, geopolitical crisis and an inverted yield curve in the United States signaling an imminent economic slowdown, investors’ need for a safe product is understandable.
As there are rising jitters in the stock market and investors are rushing to safe-haven assets, long-term bond yields are on the decline. And what could be a better pick than U.S. real estate ETFs given the steep slide in long-term U.S. treasury yield.
Investors should note that the sector traded around a one-month high on Dec 6 on the following reasons.
Decline in Long-Term Treasury Yields
The gap between short- and long-term yields has been narrowing this week. Investors should note that the U.S. Treasury yield curve inverted on Dec 3 for the first time since 2007 and continued the trend. Yield on 10-year U.S. treasury yield declined to 2.87% on Dec 6 from the high of 3.24% hit in early November. Meanwhile, yield on three-month yield curve rose to 2.42% on the day from 1.44% at the start of the year.
This was a huge positive for real estate stocks and funds as these are rate-sensitive in nature and perform well in a falling rate environment. This is because residences can be purchased and financed with a monthly mortgage payment. With mortgage rates spiraling down, real estates have every reason to cheer up (read: Bank Stocks in Bear Market: Short Sector With These ETFs).
Improving Balance Sheet & Declining Exposure to Rising Rates
In the third quarter, REIT’s leverage ratios were at their lowest levels on record. Interest expense was 22.3% of net operating income in the fourth quarter of 2017, down from 38% prior to the financial crisis.
Interest expenses of REITs also are not likely to rise much as rates move higher because almost all borrowings of REITs are fixed-rate debt. And, “REITs have extended the average maturity of their debt to 75 months, locking in these low interest rates until well into the next decade,” per reit.com.
Since the Fed has been enacting rate hikes on an upbeat economy and rising inflation, one must stuff his portfolio with inflation-protected assets. As inflation rises, purchasing power declines but prices of home values and rents normally rise. That is why, real estates are considered as inflation-protected assets and are worthy of investing in right now.
To add to the tailwinds, REITs have to pay at least 90% of their taxable income in dividends to shareholders, so they are a great option for income investors looking for steady payouts. The increase in earnings resulted in higher dividends for REIT investors.
In the fourth quarter of 2017, total dividends paid by equity and mREITs increased 4.5% over the prior quarter and 3% over fourth-quarter 2016. Notably, ETFs like Global X SuperDividend REIT ETF (SRET - Free Report) and Fidelity MSCI Real Estate Index ETF (FREL - Free Report) yield as high as 8.92% and 5.25% annually, respectively.
ETFs in Focus
Below we highlight a host of real estate ETFs that added more than 2% on Dec 6 and hit a one-month high.
iShares Residential Real Estate ETF (REZ - Free Report) ) — Up 2.8% on Dec 6
S&P 500 Real Estate Sector SPDR (XLRE - Free Report) ) — Up 2.7%
iShares US REIT Core ETF (USRT) — Up 2.7%
Dow Jones REIT ETF SPDR (RWR - Free Report) ) — Up 2.6%
S&P REIT Index (FRI - Free Report) ) — Up 2.6%
Fidelity Real Estate MSCI ETF (FREL - Free Report) ) — Up 2.6%
iShares Cohen & Steers REIT ETF (ICF - Free Report) ) — Up 2.6%
U.S. Diversified Real Estate ETF (PPTY - Free Report) ) — Up 2.5%
iShares US Real Estate ETF (IYR - Free Report) ) — Up 2.5%
Schwab US REIT ETF (SCHH - Free Report) ) — Up 2.5%
Vanguard Real Estate ETF (VNQ - Free Report) ) — Up 2.5%
iShares Global REIT ETF (REET - Free Report) ) — Up 2.2%
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