One way to bet on the Federal Reserve's latest move to lift the sinking housing market is to buy a rental property. Another cheaper and easier option: invest in an ETF that owns residential and apartment real estate investment trusts.
So far this year, interest in the 27 exchange-traded funds that invest in REITs has been tepid. But there's reason to believe that could change. The Fed's decision last week to launch Operation Twist is aimed at lowering longer-term rates to encourage longer-term investments, including equipment and property. While certain sectors of the real estate market like office and commercial space are more volatile, residential and apartment REITs may play right into the Fed's hand.
There are other reasons to like residential REITs. For one, residential REITs have returned 3.5% over the past five years, compared to a 0.78% annualized loss for the Standard & Poor's 500 stock index. And according to S&P research, apartment REITs are back on the market looking to snap up properties -- a move that could further boost returns as vacancy rates decrease and rents rise.
Of course, investing in real estate -- even through ETFs -- has its drawbacks. Residential REITs, such as publicly traded giants AvalonBay Communities (AVB)
In addition, it's unclear that the Fed's unconventional step will work. With mortgage rates already at their lowest level in decades, economists are divided over whether any slight decrease would push more Americans to borrow again. Applications for home purchases are currently at a 15-year low.
But for investors who believe this Fed move just might work, one ETF stands to benefit the most. The $145 million iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ)
Few other REIT ETFs offer as much exposure to the U.S. residential or apartment market. Of the broad-based REIT ETFs, Vanguard REIT (VNQ)