Spooked by Rising Interest Rates, Investors Flee Real Estate ETF

(Bloomberg) -- As interest rates soar to a seven-year high, investors are abandoning exchange-traded funds that are sensitive to movements in the bond market.

The $3.8 billion iShares U.S. Real Estate ETF, or IYR, is on pace this week for the most outflows in a year. The fund has lost assets for five straight sessions, with $530 million leaving between Monday and Wednesday. It went through a similar experience early last October, after 10-year Treasury yields jumped more than 30 basis points in four weeks.

Better-than-expected employment and U.S. services data alongside hawkish comments from Federal Reserve Chairman Jerome Powell helped lift Treasury yields Wednesday. The 10-year note surged to around 3.2 percent, the highest since 2011, while the 30-year rose to its highest level since 2014 and the two-year popped to a pre-crisis high.

Many investors use real estate as a defensive fixed-income-like substitute to holding bonds, according to John Zaller, chief investment officer of MAI Capital Management in Cleveland, which manages about $5 billion.

“Most people are investing in real estate for the yield associated with those investments,” he said. “If rates are rising faster than these real estate companies can increase rents, then there can be some degradation in value there, and also maybe some movement from the defensive interest rate-sensitive sectors into less interest rate-sensitive sectors.”

Dave Lutz, managing director of JonesTrading, echoed that sentiment.

“As rates move higher, it diminishes the appeal of dividend paying stocks, like REITs and utilities, while boosting the appeal of other sectors like the banks,” he said.

The S&P 500 Index’s real estate sector was down 1 percent Thursday morning in New York, with financials the only group in the benchmark in the green. IYR tracks the Dow Jones U.S. Real Estate Index.

To contact the reporters on this story: Vildana Hajric in New York at vhajric1@bloomberg.net;Sarah Ponczek in New York at sponczek2@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Eric J. Weiner, Brendan Walsh

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