ETF Lessons from the Year's First Half
It was all about heavy metal in the first six months of this year.
We all know that past performance is a poor indicator of future results, but, let's face it, it's impossible not to peek now and then to see how your portfolio and its holdings are doing. With the year half over, I took a look at the exchange-traded fund performance tables. Here's what jumped out at me.
Is this the long-feared REIT correction? Only hindsight will tell for sure, but it certainly was a rough six months for ETFs in Morningstar's real estate category. Most took a tumble. During the six months ended June 30, 2007, iShares Cohen & Steers Realty Majors (ICF) fell by 8.6%, Dow Jones Wilshire REIT (RWR) fell by 6.5%, Vanguard REIT Index (VGSIX) dropped by 6.3%, and iShares Dow Jones US Real Estate (IYR) dropped by 6.2%.
This may surprise some who expected that low unemployment, a fitful but still growing economy, and a brisk market for buyouts would continue to support demand for the apartments, offices, and shopping malls that underpin many REITs. It shouldn't come as a surprise, however, to those who have paid attention to these stocks' valuations. They've looked high by a number of measures for a long time. You could blame the REIT retreat on any number of factors--spillover from the troubles in the residential real estate market or some weaker-than-expected economic reports. But rising Treasury interest rates seem a likely cause. REITs often suffer when bond rates rise because income-seeking investors can get relatively safer yields in the fixed-income market. Plus, after rising about 300% from the start of 2000 through June of this year, REITs were ripe for a fall.
Dan Culloton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.