REIT ETFs in the Spotlight as U.S. Mortgage Rate Sinks Below 6%

For the first time since September 2022, the average long-term U.S. mortgage rate dipped below the critical 6% threshold last week. According to Freddie Mac (Federal Home Loan Mortgage Corporation), the benchmark 30-year fixed mortgage rate fell to 5.98%, significantly lower than the 6.76% average from a year ago. This decline, driven by the 10-year Treasury yield hovering around 4.02%, arrives just as the crucial spring home-buying season gets underway.

This reduction in borrowing costs has broad implications for the economy. Lower rates breathe life into households by reducing the cost of new debt and sparking a surge in refinancing demand, which frees up consumer disposable income. For homebuilders, this shift signals a more robust spring buying season, while real estate companies find relief in lower capital costs.

While recent data shows existing home sales slumped in January, economists suggest that sustained rates below 6% could be the catalyst that finally "gets people off the fence," encouraging both buyers and sellers to re-enter the market. This renewed activity should thus directly benefit real estate operating companies, setting a more optimistic stage for investment trusts that hold these assets, and by extension, REIT exchange-traded funds (ETFs).

The Mortgage Rate-REIT Connection: Why Lower Rates Matter

The performance of Real Estate Investment Trusts (REITs) is closely tied to interest rates through two primary channels. First, REITs often rely on borrowing to finance their property portfolios, so lower mortgage rates reduce their cost of capital and can improve profit margins. 

Second, and perhaps more importantly, REITs are often viewed as a bond proxy by investors. When mortgage rates—and broader bond yields—fall, the relatively high dividend yields offered by REITs become more attractive to income-seeking investors, driving up demand for REIT shares.

The current drop in rates below 6% therefore creates a favorable environment for REITs, potentially boosting both their underlying real estate valuations and their appeal in the stock market.

Why Focus on REIT ETFs?

While individual REITs can offer targeted exposure, REIT ETFs provide a diversified, lower-risk way to capitalize on a broad sector rebound. By holding a basket of REITs across various sub-sectors like residential, industrial and healthcare, these ETFs allow investors to benefit from the overall tailwind of falling rates without the risk of betting on a single company.

REIT ETFs in Spotlight

Given the current conditions, investors might focus on the following ETFs with significant exposure to sectors most sensitive to lower borrowing costs.

Schwab U.S. REIT ETF SCHH

This fund, with net assets worth $9.74 billion, offers exposure to 119 U.S. real estate investment trusts classified as equities. Its top three holdings are Welltower WELL (9.56%), Prologis PLD (9.10%), and Equinix EQIX (5.39%). 

SCHH has gained 10.3% year to date. The fund charges 7 basis points (bps) as fees. It traded at a good volume of 11.13 million shares in the last trading session.

Vanguard Real Estate Index Fund ETF Shares VNQ

This fund, with net assets worth $34.9 billion, offers exposure to 148 stocks of U.S. companies within the Real Estate sector, which includes real estate management and development companies in addition to REITs. Its top three holdings are WELL (7.05%), PLD (6.86%) and American Tower Corp. AMT (4.75%). 

VNQ has risen 8.1% year to date. The fund charges 13 bps as fees. It traded at a good volume of 4.71 million shares in the last trading session.

iShares Core U.S. REIT ETF USRT

This fund, with net assets worth $3.64 billion, offers exposure to 130 diversified U.S. REITs. Its top three holdings are WELL (8.73%), PLD (8.19%) and EQIX (6.61%). 

USRT has rallied 11% year to date. The fund charges 8 bps as fees. It traded at a volume of 0.92 million shares in the last trading session. 

Hoya Capital High Dividend Yield ETF RIET

This fund, with net assets worth $99.3 million, offers exposure to 100 high-dividend-yielding real estate securities.  Its top three holdings comprise National Storage Affiliates Trust NSA (1.73%), Realty Income O (1.69%) and Lineage, Inc. LINE (1.68%). 

RIET has risen 3.4% year to date. The fund charges 50 bps as fees. It traded at a volume of 0.06 million shares in the last trading session. 

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research