Last week, the Federal Reserve announced a significant 50 basis point cut to interest rates. It’s a sign that inflation is under control and more rate cuts could be coming in the future, especially with the economy showing signs of slowing down.
Stocks which are impacted by low interest rates could stand to benefit from this development. In particular, real estate investment trusts (REITs) which carry high debt loads can incur lower borrowing costs and increase their overall profitability as interest rates come down. Plus they normally offer high yields which can be more attractive to investors at a time when rates are low.
An exchange-traded fund (ETF) which focuses on ETFs is the iShares U.S. Real Estate ETF (NYSE Arca:IYR). It has 73 holdings in its portfolio and what’s particularly attractive is that it has REITs spanning multiple sectors; you’ll get a fair bit of diversification with the fund. Industrial, retail, healthcare, and telecom REITs make up the majority of its holdings.
In the past 12 months, the ETF has risen by 22% as investors have already been expecting rate cuts to take effect this year, pricing them into the fund’s valuation. And with potentially more rate cuts on the horizon, there could be even more room for the fund to rally higher in the near future.
The ETF also pays a yield of around 2.6%, which is higher than the S&P 500 average (1.3%), giving investors further incentive to buy and hold. It has an expense ratio of 0.39%, which is relatively modest and given the good diversification it offers, it could easily be justifiable.