Sick buying high & selling low? Fed up of the fees you pay? Tired researching investments? End your financial pain now. You have the opportunity to Investments in the real estate group have not been following the broad stock market in recent months. They have been taking their cue from bonds instead.
The broad market sold off in January on concerns of slowing global growth. As bond yields fell, shares of Real Estate Investment Trusts (REITs) rose.
Growth concerns eased in February. Stocks recouped their January losses and rose to new all time highs. Bond yields surged and REIT shares declined 3% on average. Investors pulled out money from the ETFs like Vanguard REIT (VNQ) and iShares U.S. Real Estate (IYR).
REITs have surged in March after the Federal Reserve lowered the odds of an increase in interest rates near-term by acknowledging a slowdown in growth from the strong U. S. dollar.
Following this rollercoaster ride, Fidelity Real Estate (FRESX) is up 7.2% for the year. Among REIT ETFs, Vanguard REIT, iShares U. S. Real Estate, SPDR Dow Jones REIT (RWR), and iShares Cohen & Steers (ICF) are up between 6.7% and 7.9% with iShares Cohen & Steers leading the way.
What’s Ahead for Fidelity Real Estate and Real Estate ETFs
The outlook is mixed.
The fear of rising interest rates is somewhat overplayed in the context of REITs investments.
For one, the Fed has said it will be appropriate to tighten “when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term”.
With the rise in the dollar already pressuring U. S. export competitiveness and corporate profits, the Fed is likely to defer raising interest rates to the extent possible.
When the Fed does raise rates, it would be due to an improving economy. An improving economy means more jobs, higher consumer spending, and greater health care demand from which office, apartment, retail, and health care REITs can benefit.
Offsetting these positives, valuation of REIT shares is relatively rich particularly from funds from operations and dividend yield perspectives.
According to Citigroup, REITs are trading at about 17-times FFO, near the upper end of the 8-to-18 times range seen since 1996.
Likewise, REIT shares on average currently yield 3% to 3.5%, just half of their 6% to 7% long-term historical average dividend yield.
REITs shares are likely to offer a more volatile ride going forward and provide middle-of-the-road returns in 2015. Longer term, valuation can become a headwind for REITs, particularly if interest rates rise at a rapid clip.
Best Real Estate Mutual Funds and Best Real Estate ETFs
Investors seeking exposure to real estate investments with modest expense ratios for diversification purposes can look to some of the best real estate mutual funds like Cohen & Steers Realty Shares (CSRSX), Fidelity Real Estate, Vanguard Real Estate Index (VGSIX) and best real estate ETFs like Fidelity MSCI Real Estate (FREL), SPDR Dow Jones REIT, and Vanguard REIT.
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DEC. 1993 to DEC. 2023
