New money coming to Wall Street
Patience is a virtue when investing.
The idea that the Federal Reserve simply can’t raise interest rates by any significant amount without crippling our economy is one I’ve held fast to for years.
But that doesn’t mean you’re blind to short-term swings in the market based on expectations of the Fed’s next move.
In other words, we can use the current market sentiment to our advantage.
In July, I was patiently waiting. Now, it’s time to jump in, selectively of course…
In July, I warned that investors would take any temporarily upbeat economic data and use it to raise expectations for an interest rate hike. I added that this would cause rate-sensitive sectors like REITs to pull back as investors braced for another hike; this would be your buying opportunity.
There were three specific exchange-traded funds (ETFs) that I told you to watch in July: the SPDR Utilities Select Sector Fund, the iShares Core High Dividend ETF, and the SPDR Dow Jones REIT ETF.
Since then, every ETF has pulled back as expected. But now, we’re going to start going back to these ETFs one by one.
Today, our opportunity is in the REIT sector. However, instead of jumping into the ETF mentioned above, let’s trade it through the Select Real Estate SPDR (NYSE:Arca:XLRE) because it’s become the most liquid ETF REIT on the street… but more on that in a moment.
The REIT sector is a newly minted official sector of the S&P 500, and that is driving considerable capital into this group.
Let me explain…
A real estate league of its own
As of the close this afternoon, REITs will have their own sector in the S&P 500.
Previously, they were clustered 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, less liquid ETF REITs…a factor that would not allow large institutions to engage in the ETF REIT trading. .
Now that REITs are up and running in their own right, these investors will be able to flock to them, injecting more capital into the sector and driving up the underlying value of the ETF.
In short, investors can now easily and more liquidly invest in a pure REIT ETF.
The previous ETF I was tracking, the Dow Jones Real Estate Investment Trust, had the most liquidity. But the one I’m recommending today, the Real Estate Select Sector SPDR, is the ETF that large investors in the Financial ETF will receive as a dividend, and its volume has increased since the beginning of the year.
By the way, those institutions won’t receive those ETF shares until later this month, so liquidity hasn’t happened yet. But it is coming.
This is just one set of catalysts to boost the REIT sector in the coming months, and the other is the Federal Reserve…
waiting for Yellen
The Fed is the catalyst for the wild card.
We know that REITs having their own sector in the S&P 500 will allow for increased liquidity, capital inflows, and general sector coverage, all of which are positive.
The Fed, however, can throw us a curveball.
While I don’t see any reason the Fed should raise rates at this point (based on the economic data and the threat such a move poses to our economy), the Fed is under pressure to raise rates, even if it’s for a small quantity.
The 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’ll come back to the other ETFs after the Fed meeting and look at their positions from there.
For now, let’s get into the SPDR Select Real Estate Sector and profit as this new flow of funds pushes the ETF higher.
