As Featured on Financial Advisor Magazine
With volatility expected to remain elevated in the stock market and the future direction of interest rates a bit cloudy, 2019 might be a good time for financial advisors and their clients to revisit real estate investment trusts, or REITs as they’re more commonly known.
Investors looking to bet on the way interest rates affect the residential mortgage market can invest in mortgage REITs, which earn interest income by originating mortgages and purchasing mortgage-backed securities. Over the past five years, these REITs have had a 9% total annual return and yield about 11.5%, according to Nareit.
“Right now, my firm generally believes taking interest rate risk to get a return is preferable to taking credit risk,” says Patrick McDowell, a fiduciary financial advisor at Arbor Wealth Management in Destin, Fla. “We believe that short-term rates are as likely to go down as up and that long-term rates won’t fall to extremely low levels.”
His pick in this sector is Annaly Capital Management (NLY). “Annaly assumes almost no credit risk, so the main risk they are taking is interest rate risk,” McDowell says. “They essentially are like a bank in that they do better when the spread between short-term and long-term rates widens or stays consistent.”