Market Overview

The Jobs Number Could Signal Trouble For This Group Of ETFs

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The yield on the 10-year U.S. Treasury bond rose by over 2 percent last Friday, December 5 after the November employment report came in better-than-expected. The news was generally perceived as positive for the economy, and appears to have pushed investors to sell government bonds, sending yields higher.

The main driver of this selling activity was the thought that the Fed will be forced to raise its benchmark interest rate sooner rather than later. If this is the case, it will likely send bond prices lower.

While banks should stand to benefit from an increased rate hike, REITs (real estate investment trusts) could be on the other side of the eight ball. An increase in the interest rate of “risk-free” U.S. government bonds makes the interest rate paid by riskier assets such as REITs less attractive.

Most investors will purchases REITs solely for their above-average dividend, and as the Fed raises rates, the spread between Treasuries and REITs lessens (and makes the latter less appealing).

Highlighted below are a number of REIT ETFs that initially fell on the jobs report, however the move may be a short-term phenomenon.

Related Link: A Look At 4 ETFs From The 4 "Least Corrupt" Countries

iShares FTSE NAREIT Mortgage

The iShares FTSE NAREIT Mortg.REITIn Fd(ETF) (NYSE: REM) provides exposure to the residential and commercial mortgage real estate sector. It is made up of 36 stocks.

Top holdings include:

  • Annaly Capital Management, Inc. (NYSE: NLY), at 16 percent.
  • American Capital Agency Corp. (NASDAQ: AGNC), with a 12 percent holding.
  • Starwood Property Trust, Inc. (NYSE: STWD), coming in at 8 percent.

This ETF is up 9 percent year-to-date and down 2 percent over the last six months. It sports an expense ratio of 0.48 percent.

SPDR Dow Jones REIT

The SPDR Dow Jones REIT ETF (NYSE: RWR) tracks 94 companies that are invested primarily in the real estate sector in the U.S.

Top holdings include:

  • Simon Property Group Inc (NYSE: SPG), with a 10 percent holding.
  • Public Storage (NYSE: PSA), making up 5 percent of the ETF.
  • Equity Residential (NYSE: EQR), coming in at 5 percent.

The ETF is up 27 percent year-to-date and 6 percent over the last six months, and has an expense ratio of 0.25 percent.

Vanguard REIT

The Vanguard REIT Index Fund (NYSE: VNQ) consists of 138 stocks issued by real estate investment trusts. In terms of sector diversification, retail REITs make up 26 percent and residential REITs come in at 16 percent of the portfolio.

The top three holdings are identical to the SPDR Dow Jones REIT ETF with a slightly varied weighting.

The ETF is one of the top-performing REIT ETFs in the market, with a gain of 26 percent year-to-date and 5 percent over the last six months. It boasts an expense ratio of 0.10 percent.

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