How to Buy and Sell Real Estate with ETFs

Ron Rowland is president of Capital Cities Asset Management, and an expert on mutual funds, ETFs, and sector rotation strategies. As the co-editor of Weiss Research’s International ETF Trader service, he has been helping subscribers increase their wealth with exchange-traded funds. And starting today, I’ve asked him to share some of his wisdom with you here in Money and Markets.

— Martin

If you’ve had your eyes open the last two years, you know that real estate is in a brutal bear market.

Just in October, new home sales dropped 5.3%.

Existing home sales fell 3.1%, according to the National Association of Realtors.

And the latest S&P/Case-Shiller report shows home prices dropped 17.4%. That’s bad enough but in some areas it was much, much worse — housing prices dropped 31.9% in Phoenix, 31.3% in Las Vegas, and 29.5% in San Francisco. Ouch!

The carnage is spreading to commercial real estate, too. The tenants at glitzy retail and office buildings around the country are heading for the exits — leaving landlords holding the bag.

Worse, thousands of new projects are still under construction. With little hope of attracting occupants, they’re doomed to sit vacant for years.

It’s happened before — here in Austin back in the late 1980s, I called them “see-through buildings” because you could see right through the unfinished interiors and out the other side.

During real estate busts, “see-through buildings” are a common sight.

The funny part is that those very same buildings filled up quickly when the technology boom hit our city full-force just a few years later.

What does this tell us? Simple:
Real estate is a cyclical market!

Property values go up, then they go down. It’s like watching the ocean tide wash in and out at your favorite beach — though the real estate tide moves a lot slower.

People who observe this tide carefully, and buy and sell real estate at the right time, can make big profits. Some of the wealthiest people in the world made their fortunes in real estate.

But until recently, it was hard for the average investor to get involved in real estate. Sure, you could buy a house or two and rent them out, but that still left you dangerously undiversified.

Worse yet, and as many real estate investors are finding out first hand, buying and selling individual properties isn’t always easy. The market is far from liquid!

But with the advent of real-estate focused exchange-traded funds (ETFs), you are now able to play real estate with far greater diversification and far better liquidity.

In fact …

For most investors, ETFs are by far the best way to buy and sell real estate!

ETFs are nothing more than mutual funds that trade on an exchange, just like shares of stock.

Inside real estate ETFs, you’ll find shares of Real Estate Investment Trusts (REITs) — properties that are packaged together and sold to institutional investors.

Here’s a critical point: Each REIT is already diversified, and with an ETF you get a whole bundle of REITs. In other words, you’ll own a tiny slice of thousands of different properties!

That makes you far more diversified than you could ever get on your own.

You can also get real estate ETFs that specialize in particular areas: commercial, residential, industrial, retail/office, Europe, Asia, China, Japan, global, and more.

Five Well-Known Real Estate ETFs
Name	Ticker
iShares Dow Jones U.S. Real Estate	IYR
iShares Cohen & Steers Realty Majors	ICF
SPDR DJ Wilshire REIT	RWR
Vanguard REIT Index	VNQ
SPDR DJ Wilshire International	RWX

Real Estate ETFs give you more than just diversification and liquidity, too. Here are four more advantages:

Advantage #1: Transparency — Unlike conventional mutual funds, ETFs have to disclose all their holdings every business day.So if you see something suspicious — like those risky derivatives that have been blowing up left and right lately — you can avoid that ETF.

Advantage #2: Clear pricing — You’ll know every day how your ETF is doing: just look up the ticker symbol wherever you get your stock quotes. If it starts heading downhill, you can get out without even hanging up a “For Sale” sign.

Advantage #3: Simplicity — You won’t have a lot of tax headaches like you get from owning property directly. Everything you need to know will be reported to you at year-end by your brokerage firm.

Advantage #4: Low costs — Trading commissions are miniscule compared to the 6% commissions and closing costs of regular real estate.

“Wait a second, Ron,” you may be saying. “This is all great, but you just said yourself that real estate is in a bear market. Why should I buy real estate ETFs now?”

My answer: You probably shouldn’t. Most real estate ETFs have plunged this year, and I don’t think they’ve finished falling yet.

But that brings me to one final point …

There Are Even Real Estate ETFs that Help
You Profit from the Downside!

If you’re bearish on real estate, there’s a nifty inverse ETF you should know about. It’s called ProShares UltraShort Real Estate and the ticker symbol is SRS.

The SRS is designed to move in the opposite direction of the Dow Jones U.S. Real Estate Index. So when the index goes down, SRS goes up … TWICE AS MUCH.

That leverage makes SRS extremely volatile. Just in the last few weeks, the shares have traded as high as $295 and as low as $108.

In other words, timing is critical. If you buy SRS, watch it like a hawk, and don’t get greedy. Grab your profits before they slip away.

I’m not one to toot my own horn, but I should disclose here that subscribers to my International ETF Trader service recently booked a 98% partial gain in SRS. They’re still holding the rest of their position, which we opened back in July.

But the bottom line is that with good timing and the right ETFs, you can make money in real estate in both directions. The tools are there — it’s up to you to use them.

Best wishes,

Ron

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