September 27, 2011

Operation Twist Makes REIT ETFs a Good Bet

Look to residential real estate ETFs to capitalize on the Fed’s latest move

As equity markets struggle to decide whether or not to like Operation Twist, bond markets have clearly pronounced in favor. For clients with a riskier—but not suicidal—flair, ETFs are one way to take advantage of what the Fed has to offer.

According to Ari Weinberg of Smart Money, a strong bet on the Federal Reserve's latest move involves ETFs that owns residential and apartment real estate investment trusts.

“So far this year, interest in the 27 exchange-traded funds that invest in REITs has been tepid,” Weinberg writes. “But there's reason to believe that could change. The Fed's decision last week to launch Operation Twist is aimed at lowering longer-term rates to encourage longer-term investments, including equipment and property. While certain sectors of the real estate market like office and commercial space are more volatile, residential and apartment REITs may play right into the Fed's hand.”

He notes there are other reasons to like residential REITs.

“For one, residential REITs have returned 3.5% over the past five years, compared to a 0.78% annualized loss for the Standard & Poor's 500 stock index. And according to S&P research, apartment REITs are back on the market looking to snap up properties—a move that could further boost returns as vacancy rates decrease and rents rise.”

But investing in real estate has its downside. Certain residential REITs were particularly volatile on the front and back end of the financial crisis. And Weinberg reminds readers of their tax inefficiency, suggesting their inclusion in IRAs and 401(k)s as a possible solution.

“In addition, it's unclear that the Fed's unconventional step will work,” he concludes. “With mortgage rates already at their lowest level in a decades, economists are divided over whether any slight decrease would push more Americans to borrow again. Applications for home purchases are currently at a 15-year low.”

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