Four Paths To Real Estate Profits With ETFs (XHB, ITB, PKB, SRS, DRV, TOL, PHM, IYR, RWX, REZ, REM, AGZ)
Ron Rowland: I’ve spent my investment career following sector momentum, and it’s worked out pretty well. ETFs make it even better. Right now my indicators show a lot of short-term strength in real estate. Personally, I find it hard to believe the housing market has truly bottomed. My colleague Mike Larson recently gave you some good reasons to doubt the housing rally.
In my experience, trends (either up or down) endure longer than most people think possible. So it makes sense to at least be aware of the alternatives on both sides.
Today I’ll tell you about four paths to the real estate sector with ETFs. I’ll also describe a couple of ways you can make a bearish bet on this group.
Builder, Owner, Lender, or More?
If you’ve ever bought or built a house, you know how much work happens before you even get the keys. The same is true for real estate investors. Through ETFs, you can …
- Build homes
- Own homes
- Lend money for homes, or
- Own a home lender.
Let’s look closer at each category and some example ETFs.
Path #1— Home Builder ETFs
Building homes sounds easy enough, but in fact it’s intensely competitive.
That’s doubly true for the big builders that construct entire communities from scratch. They have to plan years in the future and market very aggressively. Moreover, their profits are largely at the mercy of economic forces they can’t control.
Nevertheless, when the stars line up correctly, big homebuilders like Toll Brothers (NYSE:TOL) and Pulte (NYSE:PHM) can make a lot of money. Here are some ETFs that give you quick diversification in this group.
- SPDR S&P Homebuilders (NYSEArca:XHB)
- iShares Dow Jones U.S. Home Construction (NYSEArca:ITB)
- PowerShares Dynamic Building & Construction (NYSEArca:PKB)
Path #2—REIT ETFs for Income and Growth
REIT stands for Real Estate Investment Trust. It’s a special category of securities that represents tradable ownership shares of a real property portfolio.
Just like real estate, REITs are available in all flavors. Some target certain types of property: Commercial, residential, geographic regions, etc. REITs may emphasize current income or seek capital growth.
REIT ETFs own a portfolio of REITs, each of which in turn has a portfolio of properties. Here are a few examples:
- iShares Dow Jones U.S. Real Estate (NYSEArca:IYR)
- SPDR Dow Jones International Real Estate (NYSEArca:RWX)
- iShares FTSE NAREIT Residential Plus Capped (NYSEArca:REZ)
Path #3—Mortgage Lending ETFs
Unless you’re one of the lucky few who can buy a home with cash, you’re either renting or you have a mortgage. If you have a mortgage, you borrowed money from someone. Who? Most likely, it was a securitized mortgage lender. These nebulous pools of money own a majority of home mortgages in the U.S.
Here are some ETFs that put you on the other side of the table, making you the lender …
- iShares FTSE NAREIT Mortgage Plus Capped (NYSEArca:REM)
- Market Vectors Mortgage REIT Income (NYSEArca:MORT)
- iShares Barclays Agency Bond (NYSEArca:AGZ)
- Vanguard Mortgage-Backed Securities (NYSEArca:VMBS)
- SPDR Barclays Mortgage Backed Bond (NYSEArca:MBG)
Path #4—Equity Stake in a Lender
SPDR S&P Mortgage Finance ETF (NYSEArca:KME) is closely related but a step removed from the direct lenders. KME owns common stock of companies involved in mortgage lending. These tend to be the smaller banks as well as peripheral businesses like mortgage insurers.
Bonus Path—Betting AGAINST Real Estate with Inverse ETFs
ETFs can help even if you think the real estate bear isn’t through growling. Inverse ETFs are designed to go up in value as an index goes down.
Presently U.S. investors can access two such ETFs:
Note that both of these carry built-in leverage (2x for SRS and 3x for DRV). Because the leverage factor is adjusted daily, they won’t necessarily give you 2x or 3x the amount the underlying index falls for periods longer than one day.
Inverse ETFs are trading vehicles. They’re not designed to buy and hold. Success with them depends heavily on your timing.
There you have it: Four different categories of real estate ETFs and a couple of inverse ETFs as well. Use them cautiously, and good luck!
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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