Surprise! REITs, Emerging Markets Do Well When Fed Rates Rise - TheStreet

NEW YORK (TheStreet) -- Fears of a Federal Reserve rate hike have caused the iShares US Real Estate ETF (IYR) - Get Report to fall more than 9% year-to-date. Still, Bob Johnson, CEO of The American College of Financial Services, said that based on historic trends, it's the wrong move to abandon REITs at the start of a tightening cycle.

"REITs are one of those asset classes that have done well during a rising rate environment," said Johnson, who is a proponent of the Fed raising rates sooner rather than later. "I think that the investors who have been fleeing REITs may want to reconsider getting back into that sector."

Similarly, the conventional wisdom is that emerging markets feel the most pain when the Fed raises rates, which explains in part why the iShares MSCI Emerging Markets ETF (EEM) - Get Report has fallen 14% so far in 2015. However, Johnson said the evidence disproves that view, noting that emerging market indexes have actually flourished when the Fed is raising rates, as they offer a haven for investors from falling developed markets.

"My coauthors and I studied the markets from 1966 through 2013, and over that time period, emerging markets actually did quite well during a rising interest rate environment," said Johnson. "In fact, they did better than in a falling interest rate environment."

In terms of winning sectors during a rate-hiking cycle, Johnson said energy, consumer goods, utilities and food providers do best. He added that a broad basket of commodities perform well as rates rise, as do Treasury bonds.

"Large-cap stocks have averaged less than 6% during rising interest rate environments over that time period," said Johnson. "Long term Treasuries have averaged in excess of 6% during that time period. It's just what the data tells us."

Gold, on the other hand, is not a great place to be when the Fed hikes rates in Johnson's view. Nor are hedge funds, despite their widely marketed claims to be strong performers when long-only managers find themselves fighting the Fed.

"Our research has shown that hedge funds have performed when the Fed has been expansive in monetary policy," said Johnson.