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Avoid Fed Shenanigans With This Real Estate ETF

September 12, 2016 8:32 am
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It is obvious the impact that even mere speculation of the Federal Reserve raising interest rates can have on rate-sensitive asset classes such as real estate investment trusts (REITs) and the corresponding exchange-traded funds.

Words Matter

Just look at last Friday and the Vanguard REIT Index Fund (NYSE: VNQ), the largest U.S.-listed REIT ETF. A member of the Federal Reserve said the U.S. central bank should not wait too long before raising rates again. That sent REITs and VNQ tumbling. The big REIT ETF tumbled nearly 4 percent, far worse than the 2.1 percent shed by the S&P 500.

Proving that sometimes it pays to be tactical with one's real estate allocations, the Tierra XP Latin America Real Estate ETF (NYSE: LARE) was significantly less worse than VNQ and other U.S.-focused REIT ETFs last Friday. LARE lost just 2.2 percent on renewed Fed rate hike speculation. So, not only did LARE perform essentially in line with the S&P 500 last Friday, it outperformed the MSCI Emerging Markets Index by about 110 basis points.

Related Link: Markets Falter On Rate Hike Worries

LARE also beat the iShares Latin America 40 Index (ETF) (NYSE: ILF) and the iShares MSCI Brazil Index (ETF) (NYSE: EWZ) by 250 and 350 basis points, respectively.

More Support For LARE

This is not a one-day trend for LARE. The ETF is making a habit of outperforming traditional U.S. REIT ETFs while being only modestly more volatile. Year-to-date, LARE is up 28.1 percent, more than triple the nearly eight percent offered by VNQ.

Investors considering an ETF like LARE, while it is a one-of-a-kind ETF, should drill down deeper regarding the significant tailwinds for this fund. Not only are LARE's member firms inexpensive on valuation, but they are expected to post robust earnings growth this year. Higher earnings from real estate companies can lead to increased funds from operations (FFO). FFO is the key metric by which investors analyze a real estate firm's ability to sustain and grow dividends.

LARE, which tracks the Solactive Latin America Real Estate Index, has also been significantly less volatile this year than EWZ and ILF. Additionally, the lone ETF dedicated to Latin American real estate investments makes good on one of the primary reasons investors embrace REITs: Reduced correlations relative to traditional asset classes. LARE's average correlation to EWZ and ILF is just over 0.4.

LARE's holdings have an average market value of $1.5 billion. Brazil and Mexico, Latin America's two largest economies, combine for 96 percent of the ETF's weight, according to issuer data.

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