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Real Estate ETFs May Face a Tough Road Ahead

Although many have suggested that the real estate markets have bottomed out, recent data which showed that new construction starts have dipped may suggest otherwise.

Some forces that were driving the housing markets, including low mortgage rates and attractive tax credits for first-time homebuyers, are likely to be overshadowed by increases in foreclosures and a weak labor market.

According to a study conducted by the National Realtors Association, the number of foreclosures in the coming quarter is expected to rise significantly.  To make matters worse, of these foreclosures, a large portion are expected to be strategic and planned in nature.  Many homeowners are realizing that the negative equity they have in their homes deals a real blow to their personal balance sheets and are deciding to walk away from their obligations.  This will result in increased supply of homes on the market. 

Secondly, it is just a matter of time before the Fed increases interest rates, which will bump-up mortgage rates and make home loans less appealing.  Lastly, there seems to be no relief in the labor markets.  The most recent data suggests that companies continue to implement lean measures and are reluctant to hire.  Without a job, banks will obviously not issue loans. 

Although the real estate sector is in better shape than it was a year ago, an uphill battle seems to lie ahead and President Obama’s call for tougher bank rules doesn’t help.

 Some ETFs to keep a close eye on are the following:

• SPDR S&P Homebuilders (XHB), which holds all of the major home builders like Pulte Homes and DR Horton.
• iShares Dow Jones Real Estate (IYR), which primarily tracks REITs and is more orientated towards commercial property than residential.
• ProShares UltraShort Real Estate ETF (SRS), which enables investors to bet against the real estate market.

Schwab Broadens Its Exposure To ETFs

As the appeal of international markets continues to draw investor dollars, Charles Schwab recently announced the launch of two new exchange traded funds (ETFs) which give exposure to overseas markets (Another way to play international markets).

The first is the Schwab Emerging Markets Equity ETF (SCHE), which carries an expense ratio of 0.35% and offers diversified exposure to 470 large and mid-cap stocks in over 20 developing countries.  When compared to its competitors, SCHE is cheaper than the iShares MSCI Emerging Markets (EEM) and the SPDR S&P Emerging Markets (GMM).  In regards to portfolio weighting, the new ETF allocates most of its assets to financials, energy and materials. 

The second newly launched ETF is the Schwab International Small-Cap Equity ETF (SCHC), which carries an expense ratio of 0.35% and offers diversified exposure to international small-cap companies.  SCHC holds 876 stocks and allocates the majority of its assets to industrials, financials and consumer discretionary sectors.  When compares to its competitors, the new Schwab fund has lower expenses than the Vanguard FTSE All-Wld ex-US SmCp Idx ETF (VSS), the iShares MSCI EAFE Small Cap Index (SCZ) and the SPDR S&P International Small Cap (GWX).

The emergence of these two new ETFs will not only enable Schwab to take a bigger piece of the ETF pie, but will likely bolster net inflows of assets into the ETF landscape (The benefits of ETFs).  A recent study conducted by Cogent Research revealed that Charles Schwab is the number one distributor and brokerage firm amongst affluent investors.

401(k)s Gobble Up ETFs

As investors and financial advisors continue to educate themselves on the benefits that exchange traded funds (ETFs) can offer, the growing appeal of ETFs seems to be making its way into retirement plans.

Most recently, Ian Salisbury of the Wall Street Journal reported that BlackRock Inc., the largest ETF provider, estimates that investors hold nearly $2 billion worth of its ETFs in 401(k) plans.  This marks tremendous growth when compared to the $500 million that was held in these plans last year.

Some of the benefits that ETFs can offer include transparency, lower costs, tax efficiency and flexibility.  Flexibility, in particular, is one of the key drivers behind ETF growth.  ETFs enable investors to reach hard-to-access markets such as commodities, currencies and international markets with the same ease as a run-of-the mill domestic company stock (More on ETF Benefits).

For example, an investor can easily access crude oil through the US Oil Fund (USO) or play the agriculture markets by gaining diversified exposure through the PowerShares DB Agriculture Fund (DBA), which is a one-stop shop for access to cattle, soybeans, lean hogs, coffee, corn, and sugar.

Additionally, as developing nations start to decouple from the United States and Europe, they have become more appealing to investors.  With this in mind, ETFs give investors the choice to play international markets using a country-specific strategy, like the iShares MSCI Brazil Index (EWZ), which gives exposure to emerging Brazil, or a diversified strategy, like the iShares MSCI Emerging Markets Index (EEM), which gives exposure to Brazil, South Korea, Taiwan, China and India (Other Ways To Go International). 

The continued growth and appeal of these investment tools has driven many large financial institutions to enter the landscape to get a piece of the pie.  Companies like Charles Schwab and T.Rowe Price, who are big players in the retirement plan space, have entered the ETF marketplace which will likely further boost the use and appeal of these advantageous products in 401(k)s.

International Bond ETFs Offer Diversification

As developing nations continue to grow and investment dollars find their way overseas, international bond exchange traded funds (ETFs) may be the answer to portfolio diversification and risk minimization.

As ETFs continue to grow in popularity, they can offer investors exposure to international debt with relative ease.   The reasons behind gaining exposure to international debt include spreading out the sensitivity of U.S. interest rate movements and playing currency exchange movements.  However, Kyle Waller of Index Universe states that it is generally a better idea to use international bonds of developed nations rather than that of emerging nations.

It is equally important to consider the risks involved in dealing with international bond ETFs – in particular, the increase in default risk that is expected to be seen in some European nations (Know the risks of Bond ETFs).  For this reason, it is important to completely understand what one’s investments hold.

A few international bonds to consider are:

• iShares S&P/Citi Intl Treasury Bond (IGOV), which carries an expense ratio of 0.35% .  IGOV holds 44 different bonds with an average duration of 5.8 years and gives bond exposure to markets like Japan, the United Kingdom, France and Germany.
• iShares S&P/Citi 1-3 Yr Intl Treasury Bd (ISHG), which carries an expense ratio of 0.35 %.  ISHG holds 26 bonds with an average duration of 1.67 years and gives exposure to markets like Japan, Belgium, Spain and Finland.
• SPDR Barclays Capital Intl Treasury Bond (BWX), which carries an expense ratio of 0.35%.  BWX holds 82 different international bonds, is primarily focused on Japan, Germany and Italy and has an average duration of 6.1 years.

A New Way To Play International Markets

In an era where exchange traded funds (ETFs) continue to draw appeal, ETF providers are in full swing and introducing new products at the blink of an eye.

Most recently, WisdomTree announced its newest ETF, the WisdomTree International Hedged Equity Fund (HEDJ).  This ETF is designed to give exposure to international markets, particularly Europe, Asia and Australia, while neutralizing currency movements in these regions versus the U.S. dollar (More Ways To Play International Markets).

What’s unique about HEDJ is that it is a fund of ETFs, meaning that its holdings are comprised of other ETFs.  The new ETF invests primarily in the WisdomTree Europe Total Dividend Fund (DEB), the Japan Total Dividend Fund (DXJ) and the Pacific ex-Japan Total Dividend Fund (DND).  From a sector perspective, financials, industrials and energy are the top three sectors tracked by HEDJ.  In regards to country exposure, the United Kingdom and France make up over 33% of its total asset base.

According to WisdomTree, HEDJ, which carries an expense ratio of 0.58%, gives investors the ability to diversify by gaining exposure to international markets without having to worry about appreciation or depreciation of currencies.  The ETF achieves this by using forward contracts to neutralize the movement of the currency in direct proportion to the country weights of the equities in the fund.   This will be beneficial if the U.S. dollar gains strength against other currencies (Possible U.S. Dollar Plays).