Mortgage rates last week climbed to their highest levels since the beginning of the year on elevated economic risks. With markets still hopeful of at least one interest rate cut in the second half, the real estate sector stands poised to bounce back in a lower rate environment.
While mortgage rates climbed ever higher in May, applications proved resilient, up 18% compared to the same time period last year, reported CNBC. However, refinance applications fell week-over-week as consumers grappled with heightened uncertainty and the current reality of elevated rates. The Fed continues to hold rates steady while monitoring labor market health and watching for tariff impacts.
Tariffs remain the great unknown, with their potential for broad economic and inflationary impacts. Should inflation rise and consumer demand fall, economic slowing would in-turn lead to weakening in the job market. It’s a domino effect that would spurn the Fed into action, cutting rates to attempt to bolster the labor market.
Interest rate cuts would bring relief for homebuyers and the real estate sector broadly. Declining rates create a more favorable environment for financing, driving increased demand across real estate sectors. The CME Group FedWatch Tool currently puts market estimates for a quarter point interest rate cut at 48% for the September FOMC meeting.
For those investors wanting to harness the potential of the sector while earning income, the NEOS Real Estate High Income ETF (IYRI) is worth consideration. The fund boasts a distribution rate of 11.86% as of April 30, 2025. Distribution rate is a forward-looking measure that annualizes the most recent distribution and then divides by the fund’s NAV. It’s what an investor would earn over the course of a year should distributions remain the same.
IYRI is actively managed and invests in U.S. real estate investment trusts (REITs) within the Dow Jones U.S. Real Estate Capped Index. The ETF contains companies that invest in real estate via development, ownership, or management. The index cap ensures that no single stock makes up more than 10% of the index.
IYRI also writes covered calls on the index, or on ETFs that track the index. Covered calls entail buying an asset while also writing a call on the underlying asset. This generates a premium but also caps the upside potential should the underlying asset appreciate. In essence, the strategy trades a portion of potential upside capture and translates it into income.
The calls written may be exchange-traded options or, more often, Flexible Exchange (FLEX) options. While both options are guaranteed by the Options Clearing Corporation, FLEX options allow for greater customization. This includes specifying strike prices and expiration dates.
The managers may also deploy a call spread strategy in specific circumstances, selling calls while also buying long call options on the Index. When using the call spread, the managers work to create a net-credit where premiums earned offset the costs of purchasing calls. In addition, the managers may chose exit option positions before their expiration in order to minimize losses or capture gains.
IRYI carries an expense ratio of 0.68%.
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