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Why Real Estate ETFs are Beating the S&P 500

Neena Mishra

REITs are beating the S&P 500 index for the first time since 2015, per WSJ. While rising rates hurt REITs earlier this year, they have rebounded nicely over the past two months as investors are rotating to more defensive areas. With trade tensions, slowing global growth and peak in earnings weighing on investor sentiment, this trend may continue.

Change in interest rate outlook also helped REITs. While the Fed raised rates this week, as widely anticipated, expectations for rate increases in 2019 have come down significantly of late, with the change in outlook for growth and inflation.

Research shows REITs are highly correlated with equities in the short term but over the longer term, they exhibit positive correlation with real estate and low or even negative correlation with equities. Thus, they add diversification benefits to the portfolio.

REITs own and operate income-producing real estate. They are required to distribute at least 90% of their taxable income to shareholders annually in the form of dividends and in turn, they can deduct those dividends paid from their corporate taxable income. Thus, they have very juicy dividend yields.

REITs in general are now much less leveraged compared to historical levels and many have refinanced their debt at much lower interest rates. Also, many REITs were able to acquire premium properties at attractive prices during the downturn.

To learn more about the Vanguard Real Estate ETF (VNQ), the Schwab U.S. REIT ETF (SCHH) and the Real Estate Select Sector SPDR Fund (XLRE), please watch the short video above.

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