The iShares Dow Jones US Real Estate (ETF) (NYSE: IYR) and other exchange-traded funds holding real estate investment trusts (REITs) deserve some credit. Often viewed as highly sensitive to rising interest rate, some REITs have actually moved higher following last week's interest rate hike by the Federal Reserve.
For example, IYR is up almost 1 percent over the past week. With many investors expecting the Federal Reserve to boost interest rates multiple times this year, there has been plenty of chatter regarding rate-sensitive equity sectors.
Rate-Sensitive Equity Sectors
That conversation often includes consumer staples names and almost certainly includes utilities, the sector most inversely correlated to rising Treasury yields. It also includes the real estate sector and ETFs such as IYR. However, some modest increases to U.S. borrowing costs do not mean all REITs will be imperiled.
“Resilient rental income has helped support U.S. real estate returns during past rate-hiking cycles, especially during more gradual ones like today’s [...] And commercial properties are typically able to raise rents in reflationary periods, albeit often with a lag, providing some inflation protection,” said BlackRock in a recent note.
More About IYR
The $4.44 billion IYR is almost 17 years old and holds 126 stocks. Real estate is now the 11th sector tracked within the S&P 500 after the group was separated from financial services last year. The ETF allocates over 28 percent of its weight to specialized REITs.
However, a potential area for concern is a 16.3 percent allocation to retail REITs, a group that is now heavily shorted as bearish traders look for new opportunities to hit flailing brick-and-mortar retailers.
“We favor industrial and office properties that should benefit from reflation. We are neutral on apartments due to elevated supply and avoid retail properties due to e-commerce competition. We like selected publicly traded U.S. real estate investment trusts and commercial mortgage-backed securities,” said BlackRock.
IYR, which has a trailing 12-month dividend yield of 3.5 percent, allocates about 20 percent of its weight office and healthcare REITs.
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