Housing’s recovery offers opportunities.
While housing’s collapse caused a lot of pain during the Great Recession, the resurgence of the U.S. real estate market has delivered much opportunity. A February report from the National Association of Realtors showed all-time highs for housing prices in roughly two-thirds of real estate markets. Homebuilder Lennar Corp. (ticker: LEN) is up five-fold from its crisis-era lows. Admittedly, the housing market doesn’t have the same upside potential now that the biggest part of the recovery is over. But that doesn’t mean there isn’t money to be made in real estate and related investments. Here are eight exchange-traded funds for investors to consider.
SPDR S&P Homebuilders ETF (XHB)
One of the largest residential housing-oriented ETFs in the market, the XHB manages almost $1 billion in assets and invests in a wide array of related businesses. These include homebuilder D.R. Horton (DHI), home improvement retailer Home Depot (HD) and even furnishings retailer Bed, Bath & Beyond (BBBY). This makeup gives broad exposure to housing-related businesses; however, underperformance of retail and other subgroups has held this fund back in the last year. That may be a small price to pay if you like diversification, but it’s worth noting this is not as pure a play on housing as the name may imply.
PowerShares Dynamic Building & Construction (PKB)
If a direct play on building is what you want, then look at PKB for a focus on residential building construction. These include builders like DHI and PulteGroup (PHM), plus the architectural firm Jacobs Engineering Group (JEC) that builds apartment buildings and HVAC giant AAON (AAON). Sure, Jacobs also builds roads and bridges and AAON does HVAC jobs in businesses and government buildings. But still, all of the companies on this list benefit materially from an uptrend in housing construction. That makes this a more focused fund than XHB or others in the space.
iShares Mortgage Real Estate ETF (REM)
Interested in the financing and sale of new homes? Then look no further than this iShares fund, which includes Annaly Capital Management (NLY) and AGNC Investment Corp. (AGNC) that buy mortgage-related securities. This may sound like a risky bet, given that collateralized mortgage obligations and similar instruments were a key driver of the financial crisis and market crash of 2008. However, stricter lending standards and better regulation have rejuvenated this industry. Furthermore, the stocks in this ETF tend to have juicy dividends thanks to the reliable interest payments on their mortgage-related investments. As a result, the 30-day yield of REM right now is north of 10 percent.
Vanguard REIT ETF (VNQ)
Another way to get yield in the sector is with a broad group of real estate investment trusts, an investment that must pass on 90 percent of its taxable income to shareholders. Some are developers like AvalonBay Communities (AVB), and others target commercial real estate, including mall operator Simon Property Group (SPG). And as is typical with Vanguard funds, VNQ charges just 0.12 percent annually in gross expenses — a measly $12 a year on every $10,000 invested. That’s a small price to pay for a broad fund to play the real estate market via 185 different REITs, plus generate a nearly 5 percent dividend yield in the process.
IQ US Real Estate Small Cap ETF (ROOF)
If you really believe in real estate then thinking small may be the way to go in 2018. After all, big companies have a harder time moving to meet market trends and the smaller companies can often see the biggest growth. That’s what ROOF offers. Some holdings are small commercial offerings like Empire State Realty Trust (ESRT), while others are health care plays like Physicians Realty Trust (DOC), which manages space for clinics and physicians. There is more risk in smaller companies, but there can be bigger rewards. If you don’t mind that dichotomy, then ROOF is worth a look.
Hartford Multifactor REIT ETF (RORE)
Unlike other ETFs, RORE applies a more subjective filter, purporting to find companies with “a favorable combination of high quality, high momentum and low valuation.” As such, there are only 50 holdings in this fund and they are a much more selective group. However, if you believe that performance is tied more to individual qualities of companies than broader market trends, this is the fund for you. The fund has indeed outperformed some of the other real estate ETFs on this list in the last year, but it is anyone’s guess whether that will continue.
Global X SuperDividend REIT ETF (SRET)
Another qualitative approach to real estate is to simply chase yield. That’s what the SRET does, with a 30-day yield of about 8 percent thanks to a focus on generous REITs. Unlike typical dividend stocks, distributions from SRET are monthly. So if you’re an income-oriented investor who wants a regular paycheck, the yield and frequency of distributions is a great appeal. Just keep in mind that many of the high-yielding stocks in the sector are mortgage-related investments. While the exposure isn’t as extreme as a dedicated mortgage fund, any pain for this segment of the lending market will also be felt in some way by SRET.
Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL)
If you want to be a bull on housing, then why not be a raging one? This leveraged ETF from Direxion seeks to deliver three times the returns of a broad homebuilders and construction fund through complex and aggressive strategies. Of course, three times the profits is nice, but if housing rolls over, you’ll be sitting on three times the losses. And, the fees and volatility of this fund can still bite. That’s what’s happened in 2018, with NAIL down a painful 30 percent in about three months. But if you want to be aggressive, you could buy the bottom and hope for just as dramatic a swing to the upside.
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