How is the iShares US Real Estate (IYR) ETF affected by interest rates?

Heading into June 2021, the official US federal funds rate stood at 0.25%. The near-zero rate is designed expressly to promote borrowing in the US economy. Since real estate is the most expensive form of asset holdings, low interest rates bode well for the iShares US Real Estate (IYR) ETF. The higher the rates, the lower the levels of property ownership, given the higher costs. As a rule, one can expect property bubbles to negatively affect this ETF, and periods of consolidation and growth in the property markets to have a bullish effect. Interest rates are negatively correlated with fund performance.

What are the short-term challenges/opportunities facing iShares US Real Estate (IYR) ETF?

Real estate holdings tend to suffer from rising unemployment (joblessness), declining personal disposable income, and certain geopolitical events. As a case in point, the iShares US Real Estate (IYR) ETF has a small component of hotels under management. With the recent coronavirus pandemic all but grinding travel and tourism to a halt, the ETF suffered a downturn. This was exacerbated by the prolonged lockdowns while the vaccine was being rolled out en masse. Now that vaccines are readily available in the US, Europe, and elsewhere, the short-term prognosis for this ETF is looking more bullish.

When is the right time to trade iShares US Real Estate (IYR) ETF?

Trading any ETF requires careful and methodical analysis. One of the key barometers of this fund's performance is interest rates. And for that, the Federal Reserve Bank holds all the cards. It is imperative that any trading decisions regarding this real estate ETF are closely aligned with the sentiment, or actions of the Fed. Whenever the Fed is preparing for an announcement on an interest rate decision, this will affect real estate markets through borrowing costs for financing property purchases. If the Fed decides to start talking about tapering asset purchases, this can reduce the money supply and raise rates.

iShares U.S. Real Estate ETF

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The iShares US Real Estate (IYR) ETF is designed to track the performance of the Dow Jones US Real Estate Index. This index offers exposure to Real Estate Investment Trusts (REITs), as well as other companies that invest directly or indirectly in the US real estate sector.

The IYR ETF gives investors comprehensive exposure to a sector known for delivering solid returns over the long term. It is known as having its bull markets overextended and its bear markets recovering in less time compared to other asset classes.

The IYR currently serves as the benchmark real estate ETF in the US, and it is ideal for investors that seek to expose their portfolios to this sector. It was launched on the 12th of June 2000 and trades on the New York Stock Exchange Arca under the ticker symbol IYR.

Real estate is a traditional bull market, but the sector has faced its fair share of volatility at times. This is reflected in the price of the ETF since its inception. The IYR launched with a price of $35 and maintained an upward trajectory that saw it hit a high of circa $93 by February 2007.

The subsequent burst of the real estate bubble, combined with the effects of the 2008 global financial crisis, triggered a massive tumble that saw the IYR ETF print its all-time low at circa $22 in March 2009.

Since then, the fund has posted an impressive recovery, with its multiyear rally managing to print an all-time high of just above $100 in February 2020.

The coronavirus-inspired economic shutdown initially dragged the IYR to lows of just above $60. Still, the fund displayed resilience and continued to sustain prices of above $80 as of August 2020.

IYR Composition

The Dow Jones US Real Estate Index is a float-adjusted market capitalisation-weighted index. It currently has 114 constituents that include REITs and stocks of companies involved directly or indirectly in the US real estate sector.

The IYR constituents must meet the following conditions:

The underlying company must be directly involved in the US real estate sector directly or indirectly, either through development, management, ownership, or even a property agency.
It must be a high-quality REIT with operations in the US.

The Dow Jones US Real Estate Index, which is tracked by the IYR, is rebalanced annually in September, but IPO considerations are updated in March, June and December.

Here are the top 10 constituents of the IYR as of August 2020:

American Tower Corp A
Prologis Inc
Equinix Inc
Crown Castle Intl Inc
Digital Realty Trust
SBA Communications Corp
CoStar Group Inc
Public Storage
Alexandria Real Estate Equities
Welltower Inc

The top 10 constituents carry a weight of over 40% of the IYR, making it a top-heavy Real Estate ETF in terms of market capitalisation.

Factors Influencing Overall Price of IYR ETF

While real estate is a relatively safe long-term bet, some of the factors that may impact the IYR ETF price are those that would impact the economic and monetary environment in the US.

Real estate capital inflows usually turn positive when there are low-interest rates as investors seek to take advantage of ‘cheap’ money. This is also the case when there is strong economic growth in the country.

Homeownership is an essential aspect of American living, and the IYR price can be impacted when there is specific taxation or legislation that targets the real estate sector.

As mentioned above, the top constituents in the IYR carry massive weight in the underlying index. This means that a significant price change in one or several top constituents will have an impact on the overall price of the IYR.

Why Trade the IYR ETF

Liquidity – IYR constituents are some of the largest real estate participants in the country. This ensures liquidity of the fund at all times.
Smooth Price Action – IYR tracks a top-heavy index which ensures that its price action is reliable and predictable, with a limited potential of choppy prices outside of crises.
Vast News Coverage – Because IYR tracks the largest real estate index in the US, it receives massive media attention by top investing analysts and financial professionals.

Benefits of Trading the IYR ETF with AvaTrade

Regulation – AvaTrade is a multi-regulated broker with licenses and authorisation in 7 jurisdictions around the world.
Multiple Assets – Trade IYR alongside many other assets on AvaTrade platforms that include forex, Vanilla options, stocks, commodities, indices, ETFs, bonds and cryptocurrencies.
CFD Trading – Trade IYR and other financial assets as CFDs, and trade in both rising and falling markets.
Leveraged Trading – Increase your trading capital and trade IYR with a leverage of up to .
AvaProtect™ – Trade IYR with maximum peace of mind by utilising one of the top risk management tools in the industry.
Customer Support – Enjoy support offered by the professional and responsive AvaTrade customer service team.

Frequently Asked Questions about Dow Jones US Real Estate Index Fund

How is the iShares US Real Estate (IYR) ETF affected by interest rates?

Heading into June 2021, the official US federal funds rate stood at 0.25%. The near-zero rate is designed expressly to promote borrowing in the US economy. Since real estate is the most expensive form of asset holdings, low interest rates bode well for the iShares US Real Estate (IYR) ETF. The higher the rates, the lower the levels of property ownership, given the higher costs. As a rule, one can expect property bubbles to negatively affect this ETF, and periods of consolidation and growth in the property markets to have a bullish effect. Interest rates are negatively correlated with fund performance.
What are the short-term challenges/opportunities facing iShares US Real Estate (IYR) ETF?

Real estate holdings tend to suffer from rising unemployment (joblessness), declining personal disposable income, and certain geopolitical events. As a case in point, the iShares US Real Estate (IYR) ETF has a small component of hotels under management. With the recent coronavirus pandemic all but grinding travel and tourism to a halt, the ETF suffered a downturn. This was exacerbated by the prolonged lockdowns while the vaccine was being rolled out en masse. Now that vaccines are readily available in the US, Europe, and elsewhere, the short-term prognosis for this ETF is looking more bullish.
When is the right time to trade iShares US Real Estate (IYR) ETF?

Trading any ETF requires careful and methodical analysis. One of the key barometers of this fund’s performance is interest rates. And for that, the Federal Reserve Bank holds all the cards. It is imperative that any trading decisions regarding this real estate ETF are closely aligned with the sentiment, or actions of the Fed. Whenever the Fed is preparing for an announcement on an interest rate decision, this will affect real estate markets through borrowing costs for financing property purchases. If the Fed decides to start talking about tapering asset purchases, this can reduce the money supply and raise rates.

Get a piece of the US real estate sector by trading IYR with AvaTrade. Start Today!