Fidelity Real Estate and Real Estate ETF Outlook

Investments in the real estate group have not been following the broad stock market in recent months. They have been taking their cue from bonds instead.

The broad market sold off in January on concerns of slowing global growth. As bond yields fell, shares of Real Estate Investment Trusts (REITs) rose.

Growth concerns eased in February. Stocks recouped their January losses and rose to new all time highs. Bond yields surged and REIT shares declined 3% on average. Investors pulled out money from the ETFs like Vanguard REIT (VNQ) and iShares U.S. Real Estate (IYR).

REITs have surged in March after the Federal Reserve lowered the odds of an increase in interest rates near-term by acknowledging a slowdown in growth from the strong U. S. dollar.

Following this rollercoaster ride, Fidelity Real Estate (FRESX) is up 7.2% for the year. Among REIT ETFs, Vanguard REIT, iShares U. S. Real Estate, SPDR Dow Jones REIT (RWR), and iShares Cohen & Steers (ICF) are up between 6.7% and 7.9% with iShares Cohen & Steers leading the way.

What’s Ahead for Fidelity Real Estate and Real Estate ETFs

fidelity-real-estate-and-real-estate-ETF-outlookThe outlook is mixed.

The fear of rising interest rates is somewhat overplayed in the context of REITs investments.

For one, the Fed has said it will be appropriate to tighten “when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term”.

With the rise in the dollar already pressuring U. S. export competitiveness and corporate profits, the Fed is likely to defer raising interest rates to the extent possible.

When the Fed does raise rates, it would be due to an improving economy. An improving economy means more jobs, higher consumer spending, and greater health care demand from which office, apartment, retail, and health care REITs can benefit.

Offsetting these positives, valuation of REIT shares is relatively rich particularly from funds from operations and dividend yield perspectives.

According to Citigroup, REITs are trading at about 17-times FFO, near the upper end of the 8-to-18 times range seen since 1996.

Likewise, REIT shares on average currently yield 3% to 3.5%, just half of their 6% to 7% long-term historical average dividend yield.

REITs shares are likely to offer a more volatile ride going forward and provide middle-of-the-road returns in 2015. Longer term, valuation can become a headwind for REITs, particularly if interest rates rise at a rapid clip.

Best Real Estate Mutual Funds and Best Real Estate ETFs

Investors seeking exposure to real estate investments with modest expense ratios for diversification purposes can look to some of the best real estate mutual funds like Cohen & Steers Realty Shares (CSRSX), Fidelity Real Estate, Vanguard Real Estate Index (VGSIX) and best real estate ETFs like Fidelity MSCI Real Estate (FREL), SPDR Dow Jones REIT, and Vanguard REIT.

AlphaProfit Fidelity and ETF model portfolios

AlphaProfit’s ValuM investment process combines fundamental and technical factors to consistently choose the best Fidelity Select funds and the best sector ETFs.

Compounding at an annual rate of 20.3%, a dollar invested in AlphaProfit’s selection process in 1994 is now worth $50.89 while a comparable investment in the S&P 500 is worth just $6.80.

Consistent selection of winning mutual fund picks has enabled AlphaProfit’s Premium Service to rank #1 consistently in Hulbert Financial’s investment newsletter rankings.

AlphaProfit will reposition its Fidelity and ETF model portfolios with best sector funds and best ETFs for the current market environment on March 31.

 

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New ETF and Mutual Fund Recommendations

The Fidelity and ETF Core and Focus model portfolios have gained at annualized rates of 14.5% and 17.7%, respectively since 1994. The model portfolios will be repositioned with new mutual fund and ETF recommendations on Monday, September 30. Learn more about AlphaProfit's Free and Premium Service investment newsletters.

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