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Real Estate, Retail ETFs Better Than You Think

by: Gary Gordon September 03, 2008 | about stocks: VNQ / XHB / XLY / XRT    
Gary Gordon

Gary Gordon

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If you've been burned by the commodity bear this summer... raise your Blackberry. Come on, now. There should be more gadgets in the air than that.

I am including iPhone owners. You know that the commodity sell-off nailed your portfolio as well.

Granted, you may have locked in smaller gains or limited the pain through the use of stop-losses. That'll always be the one thing that investors can do to control downside risk.

Nevertheless, energy and materials failed to provide the sector safety that many viewed as untouchable. Over the summer, however, the U.S. dollar strengthened. $150 crude / $4.00+ at the pump proved to be a breaking point. And recessionary forces moved overseas.

Suddenly, we don't seem to need as much "stuff" from the ground. At least not at the prices responsible for runaway inflation.

Still, the housing bust seems destined to head into '09. What's more, financial companies still seem to be flailing in the ocean like a swimmer in a Jaws sequel. Shouldn't homebuilders and real estate investment trusts (REITs) also be feeling the bite?

Who would have thought, for instance, that through the first 8 months of the year, State Street's Home Builders Fund (XHB) would log a 2% YTD gain? Who could have called the Vanguard REIT Index Fund's (VNQ) marginal victory of 0.5% in the positive column, when the broader market is down double digits in the blood red?

Real_estate_etf_homebuilder_etf
Whether the market is rational or irrational is not the point here. The reason for the real estate sector outperformance, particularly in the less volatile REIT arena, is twofold. First, these investments took their lumps in 2007... and helped provoke the bear out of hibernation. (Bargains often present themselves when prior year beat-downs are substantial.)

More importantly, though, we're witnessing a classic case of sector rotation. The worst stuff becomes the better stuff... and vice versa. (I discussed this sector rotation trend back at the start of June.)

Put another way, the worst performers in 2007 were real estate trusts, homebuilders, consumer discretionary, retail and financials. Indeed, financials have yet to truly benefit from sector rotation, but the numbers on the others speak volumes (1/1/08-8/31/08):

State Street Home Builders (XHB)   2%
Vanguard REIT Index (VNQ)     0.50%
SPDR Retail (XRT)       -4.00%
Consumer Discretionary Spending (XLY) -6.70%
           
S&P 500         -12.64%
Dow          -12.97%

Let's face it, most investors have not wanted to touch real estate or the consumer with a twenty-foot pole. After all, home price declines and the inability to tap additional credit has made all of us feel a little less wealthy. And yet... the broader market is far more disturbed than the above-mentioned sectors.

I'm not advocating a far-reaching revision to long-term investment themes. The world's still going to need its stuff. And valuations on energy/resources/materials will catch investor attention in the not-so-distant future.

At the same time, it is foolish to ignore obvious trends; that is, whether the consumer has been weakened, or whether home prices struggle to find a bottom, "REITs" and "Retail" may be better than you think.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

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This article has 5 comments:

  •  
    Sep 03 08:53 PM
    Let's face it, most investors have not wanted to touch real estate or the consumer with a twenty-foot pole...

    Then why did they go up? magic?
    Reply
  •  
    Sep 03 09:44 PM
    This two groups, along with telecom have a certain "so bad, they're good" value category, they've been beaten up either on a perception basis or a true sell off, the author is on to something here.
    Reply
  •  
    Sep 03 11:58 PM
    Pull XHB up on a 3 year chart. It appears that this year’s gain is probably only yet another bear market rally inside of a much stronger long-term trend down. The unwinding of the great credit supercycle marches on, imho.

    (I’m trying really hard to avoid mentioning the falling knife cliché.)
    Reply
  •  
    Sep 04 01:35 AM
    I think it is due to the large dividend payouts from REITs. But who knows if those can continue??
    Reply
  •  
    Sep 04 12:09 PM
    Ops... shouldn't that be oops? Just asking. After all, you have an extremely weak understanding of math. Perhaps your lack of knowledge extends to grammar as well.

    A few hedge funds, a number of large instituitonal money as well as savvy managers control the bulk of actual dollars being invested. They may number in the thousands. Moreover, they represent the reason for the rise in early business cycle leaders like real estate/retail.

    Meanwhile, there are hundreds of thousands, if not millions, of small investors who chase performance. The latter group are usually behind the curve. They represent the majority of investors... and they haven't wanted to go near consumer discretionary or real estate stocks.

    Hope that explains it for you, Ops.
    Reply
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