Real Estate ETFs Scaling To New Highs

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The real estate sector has been enjoying a huge rally on the dual tailwinds of accelerating economic growth and Fed’s accommodative stance. Additionally, a resurgence in the number of COVID-19 cases led to investors’ flight to a defensive sector like real estate.

The strong trend is likely to stay here for at least in the short term. Below, we have highlighted some solid reasons for their outperformance:

Economic Growth

The domestic economy is on a faster recovery path buoyed by rapid COVID-19 vaccinations, continued progress in more COVID-19 vaccines, and a huge stimulus. The International Monetary Fund (IMF) projects that the United States is likely to become the engine of global economic growth this year. The agency, in its latest update, upgraded the U.S. economic growth forecast from 5.1% to 6.4% for this year, marking the strongest growth in decades.

All these factors are brightening the prospect of the real estate sector. This is because growth in the economy translates into greater demand for real estate, higher occupancy levels, and landlords’ greater power to ask for higher rents.

Dovish Fed

Although the Federal Reserve upgraded the outlook for the economy and inflation, it still pledged to provide easy policies through ultralow interest rates and large monthly bond purchases to provide support to the economy. It reiterated its commitment to maintain lower rates near zero through 2023. This means that cheap money will flow for more quarters to come, resulting in more spending power.

The low-interest rate environment has been lending strong support to the real estate sector, pushing stocks higher. Lower rates have made buying of real estate or homes and refinancing mortgages more affordable. This, in turn, is boosting activity in the market and lifting real estate stocks.

However, the rise in Treasury yields due to inflationary pressures might hurt the rally. The Fed said the U.S. economy would temporarily see "a little higher" inflation this year as activity strengthens and supply constraints push up prices in some sectors.

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