elmwood market update - the rising interest rate opportunity
DESCRIPTION
The recent rise in interest rates, while problematic for the bond market, has created opportunities in other investment categories. In this update, we explain one such opportunityTRANSCRIPT
We Build and Preserve Wealth
Financial Planning Investment Management Tax & Estate Services
2027 Fourth Street, Suite 203 Berkeley, CA 94710
www.ElmwoodWealth.com
Elmwood Wealth Management
The Rising Interest Rate Opportunity
Interest rates have risen dramatically (purple line) the past few months. Rising interest rates have thus become the most common client question of ours recently, and for good reason. When market yields go up for your existing bond holdings, their prices then come down. Though we feel most of the upward adjustment in rates is now behind us, it still begs the question: how do we make money in an environment like this? It appears that bond investors have been spooked by the recent interest rate spike, and that fear has spread over to the REIT market as well.
REITs are securities that invest in real estate, and as long as they pass along 90% of their earnings to investors, they side step paying corporate taxes. Consequently, investors typically receive a higher than average dividend rate, making them an attractive investment.
The chart below shows the Vanguard REIT index (green/red line) as compared to the U.S. Treasury 10 year bond yield (purple line). There has been a strong inverse relationship between these two over the past 18 months. REITs have clearly suffered this summer as investors fretted about higher interest rates impacting real estate companies’ ability to continue to use the current ultra-low interest rates to finance their acquisition of new properties. While a valid concern, interest rates are still incredibly attractive relative to history. More emphasis should focus on choosing the right REIT, because history shows REITs can perform well in a rising rate and/or inflationary environment.
Elmwood looks for REITs that a) have short contract durations so they can re-price their rents as inflation rises, and b) have annual price increases built into their contracts. These companies currently present a compelling investment opportunity.
Market Update: August 22, 2013
4839-1176-4501, v. 1