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solzberg in Gainers & Losers,

Investment idea - Vanguard REIT ETF

I recommend the Vanguard REIT ETF (VNQ) for mid-term investment with a target price of $100. The Fund seeks to track the performance of the MSCI REIT Index. It invests in the stocks that make up the Index, holding each stock in the same proportion as its weighting in the Index, the remaining assets are allocated to cash investments. The Fund charges only 0.12% in annual fees, significantly lower than category average of 0.45%, and offers annualized dividend yield of around 3.4%. The Fund’s top-10 Simon Property Group (7.99%), Public Storage (4.48%), Welltower (3.22%), Equinix (3.19%), Prologis (3.06%), Equity Residential (2.99%), AvalonBay Communities (2.94%), Ventas (2.91%), Boston Properties (2.41%) and Realty Income Corp (2.07%).

After the Fed raised interest rates last December, investors fearing more interest rate hikes started to sell REITs. However, since then, the Fed has kept interest rates steady – still close to zero. After the Brexit vote, virtually everyone expects Europe’s economy to weaken. And this makes it difficult for the Fed to raise interest rates and strengthens the case for holding onto REITs.

REITs also draw investor’s attention owing to its feature of providing impressive dividend yields, especially when government bond yields declined to record low levels. Because of IRS tax rules, REITs distribute 90% of their taxable income via shareholder dividends, which makes them an attractive choice for income-seeking investors. Besides, REITs are expected to benefit from the elevation of real estate as a new S&P 500 GICS sector in September, which means that many active managers who benchmark to the S&P 500 or some widely MSCI indices will need to increase exposure to those stocks.

The US ETF Flash Flows report from State Street Global Advisors showed that real estate ETFs registered inflows of nearly $1.4 bn and $5.3 bn last month and year-to-date, respectively, clearly outperforming in terms of popularity. Moreover, these ETFs also witnessed an inflow of $7.9 bn over the past one-year period, the highest among all the sectors.

Banking on these impressive fundamentals, real estate ETFs may prove to be profitable additions to the portfolio of any investor seeking good return even in this uncertain environment. And Vanguard REIT ETF, I think, could be a nice choice in this segment.