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There’s got to be something to be said about the timing of fund offerings. We all saw the incredible push of Nasdaq linked products around the peak of 1999-2000. I remember Guaranteed Investment Certificate [GIC] linked notes offered at my local bank, and many of the other Canadian banks, that were linked to the Nasdaq 100 Index being launched near the end of our Canadian RRSP season - this is synonymous to the IRA in the US. The deadline for yearly contributions is the end of February (for the previous tax year). No need to remind you of how the Nasdaq moved after February 2000 but just in case, here’s a chart:



So I wonder now about real estate. It’s a topic that has been discussed at great length by many market observers. Like high-tech, investors can’t say later that they didn’t see it coming. I know many people in the Far East who have everything in real estate. After what happened in Japan, I wonder if they expect it to happen in their home country at some point in time … but just not now.

Maybe, but there continue to be new fund offerings allowing global investors to add more fuel to the fire (Note that after each fund’s name below, I include both their ticker symbol as well as its inception date.) They include:

1. US domiciled real estate ETFs: Many of these are a fund of REITs such as:

a. iShares Cohen & Steers Realty Majors Index Fund (ICF) 1/29/2001

b. iShares Dow Jones U.S. Real Estate Index Fund (IYR) 6/12/2000

c. streetTracks Wilshire REIT (RWR) 4/23/2001

d. Vanguard REIT (VNQ) 9/23/2004

For group #1, the ETFs with REIT exposure, the growth has obviously been great. Here’s the 2 year chart:


Like the equity markets, you basically have a nice rate of growth since early 2003. Since these ETFs have been around for well over five years (except for Vanguard which was late into ETFs anyway), investors have had a good chance to participate in the rise.

2. US domiciled real estate ETFs not focused on REITs but on home builders:

a. SPDR Homebuilders (XHB) 1/31/2006

b. PowerShares Dynamic Building (PKB) 10/26/2005

c. iShares Dow Jones US Home Construction Index Fund (ITB) 5/1/2006

Group 2 is a different story. Homebuilding was the second wave of real estate investing via ETFs with fund launches in late 2005 and early 2006. How have they done this year?


3. European domiciled real estate ETFs: I’ve seen recent news that a European ETF provider called Indexchange Investments has just launched three new real estate equities based ETFs on the Frankfurt and Stuttgart exchanges. They cover three geographic regions with these specific indices:

a. The Dow Jones Stoxx 600 Real Estate index – this index tracks 22 European real estate equities

b. The DJ Stoxx Americas 600 Real Estate index – this index holds Canadian and American real estate equities

c. The DJ Stoxx Asia/Pacific 600 Real Estate index. This index is composed of real estate stocks in Japan, Hong Kong, Singapore, Australia and New Zealand

Group #3 represents recent fund offerings in the real estate space geared for European investors. I’m sure similar funds either exist or are in the works for Asian and other international investors. I think about the timing of these and wonder.

There are other means for investors to get into real estate investing via capital markets (on top of your primary home, winter cottage, investment property for rental income, timeshare in the warmer regions, etc.) and these include:

  • Housing futures and options traded on the Chicago Mercantile Exchange. Based on S&P/Case-Shiller Home Price Indices, these cash-settled derivative contracts cover 10 major US cities individually as well as in aggregate through a weighted composite index. These actually look like a great hedging vehicle for residents in any of these large metropolitan areas with significant and highly appreciated home values. Of course, someone has to be on the other side to speculate. Goldman Sachs has recently entered into a licensing agreement with S&P for the development of financial products based on the S&P/ Case-Shiller Home Price Indices. Perhaps investors will soon be able to participate in this specialty market without direct involvement in derivative instruments.
  • Property derivatives have been in existence for about a decade in the UK albeit in limited use. The market for this type of instrument has grown in the past few years however these are instruments, often custom made, for real estate developers and perhaps institutional investors (pension funds) who are building hedging programs to overlay on top of their real estate portfolio. Again, speculators (hedge funds and others) would likely be on the other side.
  • I wouldn’t be surprised to see increased derivative and ETF development for real estate, just like we have seen recently for commodities (GLD, SLV, USO, DBC) the other asset class with plenty of press regarding its recent climb in prices. These are two of the most common alternative investment asset classes but I wonder if investors today have weightings in these two asset classes that are as large, or larger, than their holdings in traditional stock and bond positions.

    Bottom line: Be aware of new investment products in the real estate space. Perhaps some areas (emerging markets, east Asia) may be worthwhile for further analysis, but I’d be careful. No one can know if it will be as bad as the Japanese real estate market in the 1990’s or the Nasdaq crash but it’s the timing of new product development that’s the issue.

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    Source: Beware New Real Estate Investment Products