Investing in an exchange-traded fund (ETF) that can benefit from interest rate cuts can be a great move to make right now, as more cuts look to be on the horizon. According to projections from JPMorgan Chase, there could be another rate cut in December followed by more next year — it expects one per quarter.
One ETF that could soar on those developments is the Vanguard Real Estate Index Fund (NYSEMKT: VNQ). Although it has generated double-digit gains this year, it could be due for a much bigger rally in the months ahead.
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Real estate investment trusts (REITs) offer investors a great way to gain exposure to real estate. They collect recurring rent payments from tenants and can benefit from rising valuations in real estate. As interest rates come down, that can reduce costs for tenants and lessen the risk of defaults. At the same time, lower rates can result in a hotter housing market, sending real estate valuations higher. It sets up a situation where REITs can potentially make for ideal investments to hold in your portfolio heading into next year.
The Vanguard Real Estate Index Fund gives you a position in a wide variety of REITs, so you don’t have to pick whether you want to focus on hotels, healthcare, offices, or other types of REITS. Instead, by just investing in the ETF, you’ll have exposure to all those types of REITs. Retail, healthcare, and telecom are its largest REITs, but there are also many others in its portfolio.
Another reason you’ll want to consider investing in the fund is its yield. At 3.8%, the ETF pays you more than three times what you’d collect with the average stock in the S&P 500. However, if you wait too long, that yield could shrink since it’s a function of not just the dividend you receive but the price you pay for the investment. And if the ETF rises in value, which it might as more rate cuts take place, that yield will come down.
Investing in a high-yielding ETF is a way for investors to provide their portfolios with some valuable, recurring cash flow. Plus, it can pad your overall returns. In the past five years, the ETF’s share price has risen by just 6%. However, when you include dividend payments, its total returns are around 28%. While these returns may not look all that great, the future may look brighter for the fund and REITs as a whole as interest rates come down even more.
