ETF Expert

Mortgage delinquencies on residential real estate are accelerating, not decelerating. Similarly, an estimated $3.5 trillion in commercial loans are in danger of default, with no clear path to refinancing or modification to prevent massive foreclosures.

Does this spell disaster for real estate investment trusts (REITs)? Surprisingly, the answer may be… “No.”

Granted, big time real estate trusts do have subprime residential and commercial loan exposure. However, REITs also have the capacity to raise money. And while that may dilute the worth of shares for existing stakeholders, the alternative asset lure of REITs may attract plenty of newcomers.

Bob Pisani at CNBC pointed out that there is a brand new crop of REIT IPOs set to launch this week alone, including Colony Financial (CLNY), Apollo Commercial (ARI), Foursquare Capital (FSQR), and Ladder Capital (LCG). Each plans to take advantage of  the extremely distressed residential and commercial real estate world.

This brings me to a point that I have stated in earlier commentary. While existing REIT ETFs may be able to “make it” through diversification across the REIT space as well as relatively low exposure to the bad loans, why bother? Is the 5% or 6% income production really worth the volatility when you have similar yields from international REIT ETFs?

Consider the iShares FTSE/NAREIT Developed World Real Estate excl U.S. Fund (IFGL). This REIT ETF is up 41.4% in 2009 compared to 19.6% for Vanguard REIT ETF(VNQ). Granted, VNQ may be offering a yield in the 6.5% area where IFGL is closer to 3.75%. Nevertheless, the “world’s real estate excluding the United States“ is vastly superior when one takes into account the state of troubled U.S. loan exposure.

Another possibility for more speculative investors is to seriously consider buying one of the above-mentioned REIT IPOs. Personally, I think it is too risky to get in on the $20 IPO price on any of these offerings. All that is known at this point is the stated intention of these entities to pursue distressed assets.  With no idea of what the potential of their acquisitions will be… let alone the true value of those distressed assets… one is gambling on the concept as well as the jockey (management).

For those who are interested, they might do best to wait for financials, including REITs, to experience a bit of a pullback. Then one might consider an entry point with stop-loss protection.

If you’d like to learn more about ETF investing… then tune into ”In the Money With Gary Gordon.” You can listen to the show “LIVE”, via podcast or on your iPod.

Tags | "foreign real estate etf", "foreign reit etfs", "foreign reits", "international real estate etf", "reit ipos", Real Estate ETFs