Real estate investment trust (REIT) funds have struggled to add points since 2015, grinding sideways in broad trading ranges, but they are finally testing highs posted at the peak of last decade's real estate bubble. The testing process could take time to complete, but these issues are now poised to hit all-time highs in coming years, shaking off another vestige of the 2008 economic collapse.
The sector's resiliency has surprised 2019 market watchers but makes perfect sense, given three positive catalysts. First, the domestic exposure is providing safe haven against international trade and political tensions. Second, millennials are transitioning into middle age and getting ready to buy homes to raise families. Third, investors are rotating out of growth plays and into slower-moving dividend stocks as a hedge against an economic slowdown triggered by trade wars.
iShares U.S. Real Estate ETF (IYR)
The iShares Dow Jones US Real Estate Index Fund ETF (IYR) came public in the mid-$30s in June 2000 and eased into a narrow trading range between that level and resistance in the mid-$40s. It turned higher in the fourth quarter of 2003, entering a strong advance that accelerated to the upside in 2007. The fund posted an all-time high at $94.99 in February 2007 and reversed in an orderly decline that expanded into a vertical freefall in September 2008.
The March 2009 all-time low at $20.99 marked a historic buying opportunity, ahead of a strong recovery wave that stalled in the lower $60s in 2012. The fund stair-stepped higher into February 2015 and topped out in the mid-$80s, ahead of failed breakout attempts in 2016, 2017, and 2018. It finally cleared stubborn resistance in February 2019 and is now trading just five points under last decade's lofty peak.
Price action eased into a rising channel (red lines) in 2011, and the fund is still trading within those boundaries nearly eight years later. The upper channel now extends above the 2007 high, opening the door to immediate testing at major resistance, Meanwhile, the monthly stochastic oscillator has entered the overbought zone and shows no signs of crossing over, also predicting a quick trip into the mid-$90s.
Vanguard REIT ETF (VNQ)
The Vanguard REIT ETF (VNQ) opened for business in the upper $40s in September 2004, nearly four years after the iShares fund, and stalled in the mid-$50s in late December. It broke out in the second half of 2005, entering a historic trend advance that ended at $87.44 in February 2017, ahead of a modest downturn that accelerated into an all-time low in the upper teens in March 2009.
A strong recovery wave into the summer of 2011 ran out of gas at the .618 sell-off retracement level, while mini-breakouts in 2013 and 2014 posted new highs into the February peak at $89.27, less than two points above the 2007 high. The fund then dropped into a massive rectangle pattern, boxed between resistance at the 2015 high and support near $70, and it is now engaged in the second breakout attempt in four years.
The monthly stochastic oscillator is glued to the overbought level, denoting a strongly trending instrument while raising the odds that it will finally clear resistance and head into the triple digits. However, the failed 2016 breakout into $92.92 marks a final obstacle that could take time to overcome, so it's hard to recommend jumping on board unless a multi-week pullback offers a lower-risk entry price.
The Bottom Line
Real estate investment trust funds are testing multi-year resistance after under-performing broad benchmarks for four years and could enter the next decade as market leaders.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.