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The S&P/TSX REIT Index is down 18.1 per cent year to date and that’s including dividends. As I wrote in an April column, the dividend and distribution yield on REITs no longer look as attractive relative to rapidly climbing risk free government bond yields.

CIBC REIT analyst Dean Wilkinson presented a bullish counterpoint to recent sector performance in Tuesday’s Ask Not For Whom The Debt Rolls: Are Rising Interest Rates A Harbinger Of Doom?

For Mr. Wilkinson, the rising rate environment is just business as usual for the real estate sector, “REITs have long been in the business of managing debt, and a changing interest rate environment (even rapidly) is nothing more than part of the natural ebb and flow of their business cycle”.

CIBC estimates that even if financing costs double from here, the effects on general REIT profitability would be “immaterial.”

The issue of competitive risk free yields remains, but REITs are now trading at attractive valuation levels that could be fully compensating investors for inflation risk with potential price upside.

Mr. Wilkinson writes that REITs are currently trading at a roughly 24-per-cent discount to net asset value compared with the usual 5-per-cent discount. In his words, a return to normal implies “healthy double digit upside” for the sector.

The analyst sees REIT prices already reflecting a future inflationary environment of rising bond yields. With these risks largely priced in, the depressed valuations combine with reasonably attractive yields to make the beleaguered sector an interesting option for investors.

-- Scott Barlow, Globe and Mail market strategist

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The Rundown

What comes next: stagflation or a recession?

As anyone who has read a bear-market headline has gathered by now, the economic outlook is turning ugly. The question that lingers is just what form of ugliness it will take. Ian McGugan examines the investing landscape.

Goodbye TINA? The stock market is facing competition from the humble GIC

The current bout of stock market volatility has plenty of causes, including geopolitical uncertainty, soaring inflation and fears of recession. But the humble GIC can also take some credit here. Rising rates on guaranteed investment certificates may be challenging the bull-market mantra: There is no alternative to stocks, writes David Berman.

Some see few signs of a bottom in U.S. stocks, even after steep selloff

Despite a crushing selloff that pushed U.S. stocks into a bear market, investors see few signs suggesting equities have hit bottom, as persistent worries over surging inflation and an aggressive Federal Reserve continue to pressure asset prices. Reuters’ Lewis Krauskopf takes a look.

How the crypto crash exposed the sector’s lies – and left retail investors in the lurch

The crypto sector is known for being volatile, so it would be silly to write the whole thing off. But the recent crash has, in charitable terms, broken many of the promises made to investors. More critically, it has exposed the sector’s lies, according to Tim Kiladze.

Nowhere to run, nowhere to hide as ‘stagflation’ bites

If inflation were the only challenge, investors’ options to hedge or diversify their portfolios might be more straightforward. But growth is fragile, and the probability of recession in the next 12-18 months is rising by the day, says Jamie McGeever.

Others (for subscribers)

Wednesday’s Insider Report: CFO is a buyer of this high-yielding REIT nearing oversold territory

Wednesday’s analyst upgrades and downgrades

Tuesday’s analyst upgrades and downgrades

Tuesday’s Insider Report: C-suite executives are trading these five stocks

As S&P 500 confirms bear market, most of its components look worse

Others (for everyone)

With blistering inflation and hawkish Fed, bond investors push for safety

ARK’s Cathie Wood keeps focus on deflation as fund slump continues

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Ask Globe Investor

Question: What are your thoughts on holding exchange-traded funds in registered accounts given what appears to be a higher volume of reinvested or “phantom” distributions recently? In the past year I have received phantom distributions in my non-registered and registered accounts, but while I get the benefit of increasing my adjusted cost base in my non-registered account, I get no benefit at all in my registered accounts.

Answer: Increasing the adjusted cost base of an ETF in a non-registered account is only a “benefit” to the extent that it prevents you from paying more capital gains tax than necessary when you eventually sell your units. However, there are no capital gains taxes in registered accounts, so raising the ACB of the ETF would not provide any benefit. For that reason, you should feel comfortable holding ETFs in a registered retirement savings plan or tax-free savings account, for example. In addition to receiving all investment income and capital gains tax-free, holding your ETFs in an RRSP or TFSA will simplify your bookkeeping. (In the case of RRSPs, income tax only comes into play when money is withdrawn.)

Also keep in mind that 2021 was an especially busy year for phantom distributions, because surging stock markets created a lot of capital gains that ETFs distributed (on paper) to unitholders for tax purposes at the end of the year. Given the rough start for markets in 2022, however, I suspect we won’t see nearly the same volume of phantom distributions this year. For more on phantom distributions, read my recent column here.

-- John Heinzl

What’s up in the days ahead

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Compiled by Globe Investor Staff

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