Rate Relief Could Be on the Way for Real Estate ETFs

The real estate sector has been hamstrung this year as the Federal Reserve has yet to deliver widely hoped for interest rate reductions. Those are the breaks for rate-sensitive groups such as real estate.

However, the May reading of the Consumer Price Index (CPI) delivered last week stoked hopes that the Fed has the wiggle room to cut rates this year – perhaps twice – and that could support gains for real estate equities and exchange traded funds such as the ALPS Active REIT ETF (REIT).

However, good news may emerge for REIT’s near-term rate cut fortunes. Core inflation in the May CPI report ticked higher by just 0.16% month-over-month. Experts believe that implies the Personal Consumption Expenditures (PCE) Index report due out later this month will show further evidence of cooling inflation. That’s relevant for advisors and investors considering assets such as REIT. PCE data carry more weight than the CPI updates.

Fed Might Be Too Pessimistic

Regarding real estate ETFS such as REIT, there’s more to the story than interest rates. That said, the sector’s near-term outlook is very much beholden to Fed policy. The issue there is that the central bank is arguably too gloomy in its inflation views.

“So, in any case, the Fed is projecting that core PCE inflation in the fourth quarter of this year will stand at 2.8% year over year. I think that’s a little too pessimistic,” opined Morningstar analyst Preston Caldwell. “I think based on how inflation will track over the rest of this year, that will be at 2.4%, not 2.8% year over year, core PCE inflation at the end of this year. That’s much more optimistic on inflation. And so, I think if inflation comes in below the Fed’s more pessimistic estimate, then they will end up cutting two or three times rather than the one cut that they’re baking in.”