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REIT ETFs Look Attractive as Fed Eases Off Rate Hikes

This article was originally published on ETFTrends.com.

Real estate investment trusts and related REIT ETFs are rebounding as investors look back into attractive yield-generating assets with the Federal Reserve signalling it will ease back on further interest rate hikes.

Year-to-date, the Vanguard REIT ETF (VNQ) advanced 12.3%, iShares Dow Jones US Real Estate Index Fund (IYR) increased 11.8%, Schwab US REIT ETF (SCHH)  gained 12.1% and Real Estate Select Sector SPDR Fund (XLRE) added 11.8%.

Rising interest rates previously dragged on the REITs sector, hurting sales as would-be buyers faced higher borrowing costs and diminished the relative appeal of the sector's dividend payouts. However, as the Fed showed a more dovish stance on its monetary policy this year, revealing it will be more patient with future rate hikes, investors turned back to REITs for their attractive yields, strong earnings growth and cheap valuations, the Wall Street Journal reports.

According to EPFR Global data, about $1.8 billion in investment money has flowed back into global real-estate equity funds in January, the first inflows after 23 months of outflows.

“Real-estate companies can overcome higher rates, but if the Fed’s on hold and borrowing costs are staying lower, that’s great for interest-rate sensitive companies,” John Creswell, executive managing director at Duff & Phelps Investment Management Co., told the WSJ.

As the Fed eases back on policy tightening, the payouts on U.S. government bonds have also declined, pushing investors to look for more attractive options in the stock market such as REITs that typically deliver bond-esque returns and could potentially bring higher yields.

“The surprising drop in yields and the drop in mortgage rates could potentially be another positive for housing and housing-related stocks going forward,” Ryan Detrick, senior market strategist at LPL Financial, told the WSJ.

Yields on benchmark 10-year Treasury notes are now trading at 2.72% Monday after falling off from a seven-year high of 3.232% in November. Yields fall as bond prices rise.

For more information on the real estate investment trusts segment, visit our REITs category.