REIT ETFs Recover On Declining Bond Yields

by: Gary Gordon

The 10-year Treasury flirted with a yield of 2.75% as recently as last week. That was before Fed Chairman Ben Bernanke did the Texas Two Step, clarifying the central bank's intention to suppress interest rates for an extended period. Bernanke's habituated partner in the rate dance? The yield hungry investor who is addicted to low investment grade yields in order to profit from ownership in high-yield (junk) bonds, preferred shares as well as real estate investment trusts (REITs).

Now that Bernanke is emphasizing easy money for the foreseeable future, the 10-year is back down around the 2.5% level. This has offered market participants the opportunity to bid up the price on their favorite income producers once again. In particular, REIT ETFs have been attracting the lion's share of enthusiasm.

REIT ETFs After the Pullback In 10-Year Yields
Approx 5-Day %
iShares FTSE Mortgage REIT (BATS:REM) 4.8%
PowerShares KBW Premium Yield Equity REIT (NASDAQ:KBWY) 3.3%
iShares FTSE Retail REIT (NYSEARCA:RTL-OLD) 3.0%
iShares FTSE Residential REIT (NYSEARCA:REZ) 3.0%
First Trust S&P REIT (NYSEARCA:FRI) 2.9%
Vanguard REIT (NYSEARCA:VNQ) 2.7%
S&P 500 SPDR Trust (NYSEARCA:SPY) 1.7%

Another way to look at momentum in REITs is through a price ratio. For instance, the SPDR DJ Wilshire REIT (RWR):S&P 500 price ratio shows REITs bottoming out near June 21, when Bernanke last stood by the notion that monetary stimulus would be reined in by the end of 2013. The S&P 500 logged its worst drop in roughly 18 months in that trading session. Shortly thereafter, however, weaker-than-expected GDP data as well as hints from other Fed officials began casting doubt on a Fed tapering. Ever since, funds like RWR and PowerShares KBW Premium Yield Equity REIT (KBWY) have had price momentum in their favor.

Another reason for optimism that the REIT recovery will hold is the asset grouping's ability to hold above a 200-day trendline. For example, First Trust S&P REIT (FRI) fell below its long-term moving average (MA) in June, but reclaimed an uptrend a few trading days later. FRI has held onto that uptrend for three weeks already, currently residing 6% above its 200-day MA.

Virtually all of the different REIT subcategories have responded positively to the Fed's change of heart as well as the pullback in the 10-year yield; Retail (RTL), Residential (REZ) and High Yield Equity (KBWY) have rebounded as robustly as the broader asset class. The one exception? Mortgage REITs. Funds like iShares FTSE Mortgage REIT (REM) and Market Vectors Mortgage REIT Income (NYSEARCA:MORT) are still coping with the possibility that short-term borrowing costs have already risen too high, damaging the spread between those costs and mortgage debt. What's more, the value of the mortgage bonds in current portfolios may have declined substantially, requiring many companies to cut their lucrative dividends.

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships.