Japan’s Disasters Slams the Market – What Happens to REIT Now?

03/22/2011 Share 0 comments

The recent slide in global stocks due to the triple disasters in Japan erased 2011 S&P gains. The MSCI world index has decline more than 6.77% this month all the tickers are flashing red.  The Fed pledges it will continue the second round of quantitative easing by buying back more treasuries and keeping the interest rates low. The recovery is on its way but still time is needed especially in light of recent events. In addition, escalating tension in the Middle East along with the recent downgrading of Spain and Portugal by Standard & Poor’s adding downward pressure to the market. Risk is very visible at the moment.

This is an excellent time to discuss US REAL ESTATE INVESTMENT TRUST ETF’s (US REITS). With equities domestically and internationally under pressure, having an asset class that is uncorrelated with equities, can help lower risk and provide a hedge. US REITS have a total return around 17-20%. over the last 52 weeks. Please see the table of US REITS.

The two top performers are:

Ø  iShares Cohen & Steers Realty (ICF) with  a return of around 20.25%

Ø  SPDR Dow Jones REIT (RWR) with return of around 17.83%

Although the 52 weeks returns are strong, the shorter term returns shows a slowing in the momentum of REITS. Reviewing returns over time show that the US REITS are competing the Internationals REITS making it more better place for investment internationally and the show the strong fundamentals of US REITS.

LONG TERM US REITS POSITIONING:

REIT’s have enjoyed two good years of 28% returns. The key question is, “Will the rally will continue in the US REIT’s?” As long as the FED keeps interest rate low US REITS will continue to enjoy good but lower returns.. The long term of US REIT is positive and we can see further rise in the upcoming days.

Investors looking for high dividend yields also favored the REIT sector. Solid dividend payouts are arguably the biggest enticement for REIT investors as U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends to shareholders.

Conclusion

Over the past week, the world index has dropped 6.7%. At the same time, US REITs have dropped around 2.3%. With a disaster on such an unprecedented scale as Japan, almost everything is going to be hit but having an asset class uncorrelated with equities gives us an alternative path to provide a hedge.

The crisis, as disastrous as it is at a human and ecological level, will have reducing impact on financial markets over time and we will likely see REITS return back into positive territory.

Disclosure:

MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Symbols:VNQ,RWR,IYR,ICF,RWO,RWX,IFGL,DRW,WPS,

Exchange Symbols: (NYSE: vnq), (NYSE: rwr), (NYSE: iyr), (NYSE: icf), (NYSE: rwo), (NYSE: rwx), (NYSE: IFGL), (NYSE: drw), (NYSE: wps)