Given concerns over U.S.-Sino trade tensions, heightened global growth worries and a clash between the Democrats and Republicans over the Mexico border wall funding, investors' need for a safe product is understandable.
Thanks to this, long-term bond yields are on a decline. In such a scenario, U.S. real estate ETFs are the best picks given the steep slide in long-term U.S. treasury yield.
Investors should note that the sector has been trading near a 52-week high of late. Let's delve a little deeper and find out what is driving the rally.
A Dovish Fed
Yield on 10-year U.S. treasury yield declined to 2.65% on Feb 11 from 2.70% at the start of the month. Meanwhile, yield on two-year treasuries fell to 2.48% on the day from 2.52% at the start of the month. A dovish Fed has facilitated the move.
First, minutes of the Fed's December gathering released on Jan 9 indicated that still-subdued inflation led the central bank to consider a "patient" approach to future rate hikes. Then at month-end, the Fed turned completely dovish by being ready to "adjust any of the details for completing balance sheet normalization in light of economic and financial developments" (read:
Top ETF Stories of January ).
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.
A Solid U.S. Economy Boosts Demand for Real Estates
A growing U.S. economy augured well for real estates.
Rent growth has been very strong. Average occupancy rate of properties owned by free-standing retail REITs or net lease REITs was as high as 99.1% . Since the tenant pays taxes, maintenance, and insurance plus the monthly rent, this procedure lowers the REITs' exposure to rising operating expenses and more stable cash flow.
Since the Fed has been on a policy tightening mode on an upbeat economy and rising inflation, one must add 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 inflation-protected assets and are worthy of investing for the long term.
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.
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.
Notably, ETFs like
Global X SuperDividend REIT ETF SRET and Fidelity MSCI Real Estate Index ETF FREL yield as high as 7.75% and 4.91% annually, respectively.
ETFs in Focus
Below we highlight a host of real estate ETFs that grew double digits this year.
IQ US Real Estate Smallcap ETF ( ROOF ) - Up 14.96%
Wilshire US REIT Invesco ETF ( WREI ) - Up 14.20%
S&P REIT Index ( FRI ) - Up 13.37%
Vanguard Real Estate ETF VNQ - Up 13.1%
Dow Jones REIT ETF SPDR RWR - Up 13.1%
Schwab US REIT ETF SCHH - Up 13%
Want key ETF info delivered straight to your inbox?
Zacks' free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week.
Get it free >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report
First Trust S&P REIT Index Fund (FRI): ETF Research Reports Vanguard Real Estate ETF (VNQ): ETF Research Reports SPDR Dow Jones REIT ETF (RWR): ETF Research Reports Schwab U.S. REIT ETF (SCHH): ETF Research Reports To read this article on Zacks.com click here. Zacks Investment Research Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report