March 15, 2019
Real estate investment trusts and publicly-traded utility companies could be considered different sectors. One covers investments in real estate, while the other focuses on power and energy, among other things. Yet, these two sectors have been sharing one thing in common. Investors really like them.
An article in CNBC noted that utilities and REIT stocks and investments have been outperforming the broader market, recently hitting record prices on Wall Street. The XLU utilities ETF and XLRE real estate ETF are up approximately 2% over the past five sessions, versus the S&P, which has been flat.
And, if interest rates hold steady, this should continue to be the case, according to Erin Gibbs, portfolio manager at S&P Global. Stable interest rates have “a big impact on their costs, so now we know their costs aren’t going to up that much, if at all,” meaning the companies in these sectors will be more predictable,” Gibbs said on the CNBC television show, “Trading Nation.”
Slowing global economic growth is likely to prevent the Federal Reserve from increasing interest rates too much, which benefits REITs and utilities. Utilities have high debt, and higher interest rates can cause problems, as the cost of borrowing increases.
In addition, many of the REIT and utilities stocks being traded “are some of the highest dividend-yielding stocks,” Gibbs said. Given the current atmosphere of economic uncertainty, these sectors can provide some stability to a portfolio in uncertain times, she said.
While Mark Newton of Newton Advisors agrees that the two sectors have been outperforming, he suggested the situation could be temporary. A return to strength in the broader market could mean an end to these stocks’ rallies. “If the S&P gets above March highs, then the groups likely are going to start to stall out, and slow down, and really roll over,” he said.
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