REIT ETFs trouncing stocks thanks to low interest rates and flight to passive investing

Record-low interest rates, combined with growing turmoil across the global financial markets, has played right into the hands of exchange-traded funds that invest in REITs. Real estate investment trust ETFs picked up $4.9 billion year-to-date through June 30, up 104% from $2.4 billion the same period a year earlier, according to ETF.com. “The appeal is in part that REITs are U.S. centric and offer competitive and growing income streams in a low-rate environment,” said Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ. Even compared to a solid 7.14% gain so far this year by the S&P 500 Index, REIT ETFs stand out for their performance. The Vanguard REIT Index ETF (VNQ) is up 16.19% this year through July 19. The iShares US Real Estate ETF (IYR) is up 14.56%, Schwab US REITS (SCHH) is up 13.52%, and Real Estate Select Sector SPDR (XLRE) is up 11.78%. The asset flows into REIT ETFs is in stride with the pattern of money moving out of actively managed funds and into passive, index-based strategies. According to Morningstar, actively managed funds saw their largest monthly outflows since October 2007 as nearly $22 billion moved out of active funds in May. The outflows hit all active funds, with the exception of municipal bond funds, while all passively managed categories saw inflows. Along those lines, REIT ETFs are benefiting from both their indexed approach and as an income alternative. The unprecedented state of rock-bottom bond yields has sent financial advisers scrambling for creative alternatives, including abandoning bond-laddering strategies. “In the past, the ladder was designed for predictable income,” said Bryan Koslow, president of Clarus Financial. “Today, with rates near zero, we want to prepare clients for rising interest rates, so we may replace some of the bond ladder exposure with some financials or floating-rate bonds that will perform better as rates rise.”