SCHH, VNQ, XLRE: REIT ETFs are rising but risks remain

Real Estate Investment Trust (REIT) ETF stocks have bounced back in the past few days as investors attempt to buy the dip. The Schwab US REIT ETF (SCHH) rose to a high of $17.87, a few points above the year-to-date low of $17.00. It remains 17.75% below the highest level this year.

Similarly, the Vanguard Real Estate ETF (VNQ) stock rose to $76.10, also higher than the year-to-date low of $72.40. The Real Estate Select Sector SPDR (XLRE) fund also jumped to a high of $34.35, higher than the year-to-date low of $32.58.

Federal Reserve hikes

Real estate ETFs, which are known for their high dividends, have come under intense pressure this year as investors focused on the actions by the Federal Reserve. The Fed has hiked interest rates by 525 basis points in the past few months.

As a result, bond yields have surged to their highest levels in more than two decades. Money market funds and certificates for deposits are now yielding over 5.5%, drawing many income investors.

At the same time, many REITs are facing a wall of maturities in the coming years. This happened because they entered into loan agreements when interest rates were at near zero. Now, with rate at their highest points in decades, there is a likelihood that many of them will find it difficult to refinance.

Most importantly, many regional banks are now boosting their balance sheets because of the collapse of key companies like Signature Bank, Credit Suisse,  and Silicon Valley Bank (SVB).

Dividend cuts likely

Some well-known REITs have recently slashed their dividends and the situation could get worse. I recently wrote about Medical Properties Trust and WP Carey, two of the most respected players in the sector. On Tuesday, I noted that Realty Income had received a major downgrade from Bank of America analysts.

SCHH, XLRE, and VNQ ETFs have bounced back recently as American bond yields retreated from their highest levels in decades. Some Fed officials have urged caution in the next monetary policy meeting.

Still, I believe that the outlook for these funds is bearish as interest rates remain at an elevated level. Their woes will only end when the Federal Reserve points to rate cuts, which will likely happen in 2024.

Technical analysis also points to more downside in the coming weeks. The three funds, which have a close correlation remain below their 50-day and 100-day moving averages. XLRE has also retested the important resistance at $34.40, the lowest swing in May this year. Therefore, the break and retest pattern points to more downside in the coming months for the three REITs.