New Money Hitting Real Estate by Chad Shoop
Patience is a virtue when it comes to investing.
The idea that the Federal Reserve simply cannot raise interest rates by any meaningful amount without crippling our economy is one I have held steadfast for years.
The first London Value Investor Conference was held in April 2012 and it has since grown to become the largest gathering of Value Investors in Europe, bringing together some of the best investors every year. At this year’s conference, held on May 19th, Simon Brewer, the former CIO of Morgan Stanley and Senior Adviser to Read More
But it doesn’t mean I’m blind to the short-term swings of the market based on expectations for the Fed’s next move.
In other words, we can use the current market sentiment to our advantage.
In July, I was waiting patiently. Now, it’s time to jump in — selectively, of course…
Back in July, I warned that investors would take any temporarily upbeat economic data and use it to escalate expectations for an interest-rate hike. I added that this would cause rate-sensitive sectors like real estate investment trusts (REITs) to pull back as investors prepared for another hike — this would be your buying opportunity.
There were three specific exchange-traded funds (ETFs) I told you to watch in July: the Utilities Select Sector SPDR Fund, the iShares Core High Dividend ETF and the SPDR Dow Jones REIT ETF.
Each ETF has since pulled back as expected. But now, we are going to start moving back into these ETFs one by one.
Today, our opportunity lies in the REIT sector. Instead of jumping into the ETF listed above, however, we are going to trade it via the Real Estate Select Sector SPDR (NYSE: Arca: XLRE) because it has become the most liquid REIT ETF on the Street … but I’ll get to that in a moment.
The REIT sector is a newly minted official sector of the S&P 500 — and that is driving considerable capital into this group.
Let me explain…
A Real Estate League of Their Own
As of the close this afternoon, REITs will have their own sector on the S&P 500.
Previously, they were lumped into the financial sector in benchmarks created by the S&P Dow Jones and MSCI.
Prior to this move, large institutions and most mom-and-pop investors relied on buying individual stocks or the limited number of smaller REIT ETFs with lesser liquidity … a factor that wouldn’t allow large institutions to get involved in trading REIT ETFs.
Now that REITs are standing in their own right, these investors will be able to flock to them, pushing more capital into the sector and raising the underlying value of the ETF.
In short, investors can now easily and with greater liquidity invest in a pure REIT ETF.
The previous ETF I was tracking, the Dow Jones Real Estate Investment Trust, had the largest liquidity. But the one I’m recommending today, the Real Estate Select Sector SPDR, is the ETF that large investors in the financial ETF will receive as a dividend — and its volume has surged since the start of the year.
By the way, those institutions won’t receive those ETF shares until later this month, so that liquidity hasn’t happened yet. But it’s coming.
This is just one catalyst set to push the REIT sector higher in the coming months, and the other is the Federal Reserve…
Waiting for Yellen
The Fed is the wild-card catalyst.
We know that REITs getting their own sector on the S&P 500 will allow for more liquidity, capital inflows and overall coverage of the sector — all of which are positives.
The Fed, however, can throw us a curveball.
While I see no reason the Fed should raise rates at this time (based on economic data and the threat such a move poses for our economy), the Fed is being pressured for a rate hike — even if it’s by a miniscule amount.
The Fed’s next meeting concludes on September 21. That’s why I’m holding off on entering our other two interest-rate sensitive ETFs: utilities and high dividends.
The cash flow from REITs receiving their own sector will help cushion any volatility that may arise in September and ultimately will help the sector continue higher.
I’ll come back to the other ETFs after the Fed’s meeting and analyze their positions from there.
For now, let’s get into the Real Estate Select Sector SPDR and benefit as this new flow of funds pushes the ETF higher.
Editor, Prime Profits Alert