What makes REITs attractive?
REITs are investors’ preferred investment vehicles when interest rates fall, as they’re the best dividend payers. A typical REIT pays out 90% of its taxable income to its shareholders as dividends. REITs act as one of the best instruments for capital appreciation.
With the strength of the labor market faltering, market participants expect the Federal Reserve to take a dovish stance on interest rates. In its June FOMC meeting last week, the Fed didn’t cut interest rates, but Fed officials mentioned that they’d be keeping a close eye on market fundamentals and would react accordingly. With trade tensions escalating and the labor market struggling, we may yet see interest rate cuts this year.
How will a Fed rate cute affect REITs?
Hopes have emerged this year that the Fed will cut interest rates on the back of a struggling labor market, a sluggish economy, and escalating trade tensions. The market has taken this news positively, performing well in June after struggling in May. The S&P 500 Index gained 6.8% in June. The NASDAQ Composite Index gained 7.4%, while the Dow Jones Industrial Average gained 7.1%.
The SPDR Dow Jones Industrial Average ETF (DIA) tracks the Dow Jones Industrial Average. It’s gained 7.1% in June and 14.0% YTD (year-to-date) as of June 28. The Invesco QQQ Trust, Series 1 ETF (QQQ) tracks the NASDAQ. It’s gained 7.3% in June and 21.0% YTD. The SPDR S&P 500 ETF (SPY) tracks the S&P 500 Index. It’s gained 6.4% in June and 17.2% YTD.
REITs have been hot this year, and with the Fed now signaling that it may ease rates, the sector has gained more attention, according to a recent article by Forbes. The SPDR Real Estate Select Sector ETF (XLRE) has gained 18.2% YTD. XLRE tracks the Real Estate Select Sector Index. Its top five holdings include American Tower (AMT), Crown Castle International (CCI), Prologis (PLD), Simon Property (SPG), and Equinix (EQIX). Another REIT ETF that has soared on the news of easing interest rates is the Vanguard Real Estate ETF (VNQ), which is now up 17.2% YTD.