There was plenty of talk about the inverted yield curve last month, the scenario where 10-year Treasury yields creep above the yields on two-year notes, and that chatter is usually ominous in nature because the inverted yield curve has often been a reliable recession indicator.
What Happened
The inverted yield curve doesn't have to be all gloom and doom. Some historical data points indicate there are opportunities when the scenario occurs, including with real estate investment trusts, which often outperform a year after the yield curve inverts.
As it is, thanks to lower interest, REITs and the related exchange traded funds are soaring this year. The Vanguard Real Estate ETF VNQ is higher by 23.67% this year, but for investors willing to get tactical with REIT ETFs, there are better opportunities in a post-inverted curve environment.
Why It's Important
A recent note by the real estate team at Jefferies highlights some of the REIT opportunities after the yield curve inverts.
“Their note cites REITs with long lease durations, including those whose portfolios focus on health care or gaming, as sectors that do well in such a scenario,” according to Barron's. “It also likes 'secular demand growth sectors' that include data centers and industrial properties.”
Enter the Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF SRVR and the Pacer Benchmark Industrial Real Estate SCTR ETF INDS, two of this year's best performing real estate ETFs. SRVR and INDS are up 37% and 33.40%, respectively, this year, crushing VNQ in the process.
SRVR has been boosted by soaring demand for data storage real estate, which is being propelled by companies increasing needs for cloud and cybersecurity services as well as the move to 5G communication services. While that makes SRVR sound like a growth play in a defensive sector and it is, data storage REITs have some defensive traits.
“Near-term concerns of a potential global economic slowdown should not impact data center operators in most US markets directly,” according to DataCenter Knowledge. “In fact, the digital economy appears more attractive to investors, given recent global events and GDP trends.”
What's Next
As has been widely noted this year, INDS is the best way to tap the real estate angle in the booming e-commerce market, meaning this real estate ETF has a slew of favorable tailwinds. The latest online retail data from the Commerce Department confirms as much.
“Total retail sales for the second quarter of 2019 were estimated at $1,361.8 billion, an increase of 1.8 percent(±0.2%)from the first quarter of 2019,” according to the Commerce Department. “The second quarter 2019 e-commerce estimate increased 13.3 percent (±1.6%) from the second quarter of 2018 while total retail sales increased 3.2 percent(±0.5%) in the same period. E-commerce sales in the second quarter of 2019 accounted for 10.7 percent of total sales.”
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