Investors attempting to gain exposure to the housing market/real estate will either play the housing market through buying an actual property or turn to the stock market for investment products. Typically the investors will turn to REITs (real estate investment trusts), home builder stocks, or an ETF that invests in the areas. I will offer 2 unique approaches to the real estate sector; one an ETF and the other a REIT.
The ETF is the Claymore/AlphaShares China Real Estate ETF (TAO), which invests in companies that derive the majority of their income from real estate operations in China. Nearly all the 39 stocks that make up the ETF are traded overseas in China or Hong Kong, though the one exception is E-House China Holdings Limited ADR (EJ). TAO began trading in December 2007 and hit a high of $27 before hitting a low of $7 in November 2008. After finding the bottom, the ETF has begun to attract more attention with the average volume quadrupling. The 7.9% GDP increase China reported in the second quarter has only helped the bullish case for the county and its real estate stocks.
Remember what the American Dream was before the housing bubble and recession? In case you forgot, it was to own a home. Think about where China is in its stage of economic development. The middle class is growing and now families are able to afford the down payment for a loan and the demand for housing should only increase in the years to come. TAO is the best one-stop investment vehicle to play the potential boom in China real estate. Investors should look for an entry between $16 and $17.
The second investment option is Capstead Mortgage (CMO), a mortgage investment REIT that pays a quarterly dividend that currently equates to a yield of 18.4% annually. CMO has a portfolio that consists mainly of residential adjustable-rate mortgages (ARM) that are issued and guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. The company’s annual revenue has steadily increased since 2004, but the first quarter of 2009 saw a drop from one year earlier. Earnings per share for 2008 came in at $1.94 versus 19 cents in 2007 and the first quarter of 2009 saw CMO earn 58 cents, its best quarter in years.
There are a number of reasons I own CMO for clients of Penn Financial Group and believe it is an attractive long-term investment. The government backing the mortgages that CMO invests in is a man made backstop for the stock. There is also the abnormally high dividend yield that investors salivate over. Finally there is my thought process that the stock market and real estate markets have seen the worst. Back to the dividend for a moment; the last four quarter payouts were: $0.58, $0.56, $0.36, and $0.55. There is no guarantee the 18% yield remains and a good chance the quarterly payouts will vary over the years. The good news is that the company has paid a dividend since 1985 and I do not anticipate it ceasing to do so at any time in the near future. Ideally, an investor would look for a pullback to the $12.50 area for a new entry into CMO.