As the residential real estate market continues to remain volatile and highly dependent on the strength of the labor force, some signs of prosperity have emerged in real estate investment trusts (REITs) enabling the iShares Dow Jones US Real Estate (IYR), the iShares Cohen & Steers Realty Major (ICF) and the Vanguard REIT ETF (VNQ) to perform relatively well this year.
One reason these ETFs have been trending upward is because they offer an opportunity to debt that traditional financing institutions like banks and insurance companies are unwilling to take on. Increases in foreclosures, a weak job market and other recessionary factors have put extreme pressure on income producing properties leading to increased stress on the loans that these properties support. As a result, an opportunity has arisen for REITs to lend, either through debt or equity financing, to the owners of these income properties.
A second reason these ETFs have been performing well is due to the relatively low prices of real estate. As a result of the financial crisis of 2008, the real estate markets as a whole took a dive making them cheap and putting the sector in a position destined to go up.
Lastly, the diversification REITs offer to a portfolio adds to their appeal. In general, REITs have relatively low correlations and risk measures when compared to equity indices and give investors a way to mitigate the volatility of the equity markets.
As mentioned above, the following ETFs have been trending upwards for the aforementioned reasons:
- iShares Dow Jones US Real Estate (IYR), which is up 33.6% over the last year and boasts a yield of 3.56%.
- iShares Cohen & Steers Realty Major (ICF), which is up 37.3% over the last year and has a yield of 3%
- Vanguard REIT ETF (VNQ), which is up 34.9% over the last year and has a yield of 3.61%.
Although an upward trend appears to be prevailing in the REIT market, it is equally important to keep in mind the risks that are involved with investing in these ETFs. To help mitigate these risks, the use of an exit strategy which identifies specific price points at which an upward trend could come to an end is important. Such a strategy can be found at www.SmartStops.net.
Disclosure: No Positions