ETF Expert

I think there’s a television program called, “Million Dollar Listing.” I’ve never seen it.

Instead, I find myself in scores of conversations with real estate professionals. And if you speak to enough of them about their industry, your head will start to spin.

The optimists will tell you that the overall sales volume trend has picked up considerably, paving the way for future price gains. And where the volume is still a little shaky, they’ll point to price stabilization. And where there’s little evidence of any activity, they’ll suggest that… just like it looked at the top… at the bottom, it’s a stand-off between parties.

The pessimists explain that volume has been artificially inflated by government gimmicks. Given 18% unemployment/under-employment, option ARM resets, commercial building foreclosures and strict lending standards, many expect a second wave to clobber the real estate universe.

Typically, I look to steer clear of the emotional aspects tied to optimism, pessimism… bullishness or bearishness. I prefer making a decision based on a variety of risk-reward factors, and then manage the investment outcome for a big gain, small gain or small loss… never a big loss!

Predictions notwithstanding, I find REITs to be wrong. The reasons? For one thing, according to RiskGrades.com, they’re 1.5x volatile as the S&P 500 and 2.3x as volatile as iShares High Yield Corporate Bond (HYG). So if I am interested in total return at a reasonable level of volatility, I can’t see REITS being the answer.

Secondly, in the quest for diversification, are REITs really and truly a way to diversify across asset classes? Over the last year, Vanguard REIT (VNQ) and the S&P 500 SPDR Trust (SPY) have moved in lock step with one another; the correlation is a near perfect 0.99. Bring home-ownership into the equation, and REITs aren’t making sense for a diversified, market-based portfolio.

Nevertheless, I can’t argue with the super-sized gains over the last 3 months. Homebuilder ETFs have been particularly robust, whereas most REIT ETFs have doubled the output of the iShares Total Market Index Fund (IYY). Moreover, all of the Real Estate ETFs in the table below have hit new 52-week peaks.

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