Patience is a virtue when it comes to investing.
The idea that the Federal Reserve simply cannot raise interest rates by a significant amount without crippling our economy is one that I have held firm for years.
But that doesn’t mean you’re blind to short-term market swings based on expectations for the Fed’s next move.
In other words, we can use current market sentiment to our advantage.
In July, I was waiting patiently. Now is the time to intervene, selectively, of course …
In July, I warned investors would take any upbeat economic data temporarily and use it to raise expectations of an interest rate hike. I added that this would cause rate-sensitive sectors such as real estate investment trusts (REITs) to pull back as investors prepare for another surge; this would be your buying opportunity.
There were three specific exchange-traded funds (ETFs) that I told you to watch in July: Utilities Select Sector SPDR Fund, iShares Core High Dividend ETF, and SPDR Dow Jones REIT ETF.
Since then, each ETF has retired as expected. But now, let’s start going back to these ETFs one by one.
Today, our opportunity lies in the REIT sector. However, instead of jumping into the ETF mentioned above, we will trade it through the Selected real estate sector SPDR (NYSE: Arca: XLRE) because it has become the most liquid REIT ETF on the street … but I’ll get to that in a moment.
The REIT sector is a newly created official sector of the S&P 500, and that is driving considerable capital in this group.
Let me explain …
A real estate league of its own
At the close of this afternoon, REITs will have their own sector in the S&P 500.
Previously, they were grouped in the financial sector on benchmarks created by S&P Dow Jones and MSCI.
Prior to this move, large institutions and most family investors relied on buying individual stocks or the limited number of smaller REIT ETFs with less liquidity … a factor that would not allow large institutions to get involved in the REIT ETF trading. .
Now that REITs are standing in their own right, these investors will be able to flock, pushing more capital into the sector and increasing the underlying value of the ETF.
In short, investors can now easily and more liquidly invest in a pure REIT ETF.
The previous ETF he was tracking, the Dow Jones Real Estate Investment Trust, had the most liquidity. But the one I recommend today, Real Estate Select Sector SPDR, is the ETF that large investors in financial ETFs will receive as a dividend, and its volume has been increasing since the beginning of the year.
By the way, those institutions won’t receive those ETF shares until the end of this month, so liquidity hasn’t happened yet. But it is coming.
This is just one catalyst that will drive the REIT sector higher in the coming months, and the other is the Federal Reserve …
Waiting for yellen
The Fed is the wild card catalyst.
We know that REITs that have their own sector in the S&P 500 will allow for more liquidity, capital inflows, and overall sector coverage, all of which are positive.
The Fed, however, can throw a curve ball at us.
While I don’t see any reason why the Fed should raise rates at this point (based on economic data and the threat such a move poses to our economy), the Fed is coming under pressure to raise rates, even if it is for a miniscule amount.
Cash flow from REITs receiving their own sector will help cushion any volatility that may arise in September and ultimately help the sector continue to rise.
I will go back to the other ETFs after the Fed meeting and analyze their positions from there.
For now, let’s get into the SPDR of the real estate selection sector and profit as this new flow of funds pushes the ETF higher.