Investing in an exchange-traded fund (ETF) that can benefit from interest rate cuts could be a good move right now, as more cuts appear to be on the horizon. According to projections from JPMorgan ChaseThere could be another rate cut in December, followed by more rate cuts next year – one expected per quarter.
One ETF that could rise on these developments is the Vanguard real estate index fund (NYSEMKT: VNQ). Although the stock has posted double-digit gains this year, a much bigger rally could take place in the coming months.
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Real estate investment trusts (REITs) offer investors a great way to gain real estate exposure. They collect recurring rental payments from tenants and can benefit from rising property valuations. Falling interest rates can lower costs for tenants and reduce the risk of defaults. At the same time, lower interest rates can result in a warmer housing market, driving up property valuations. It creates a situation where REITs could potentially be ideal investments to hold in your portfolio next year.
The Vanguard Real Estate Index Fund gives you exposure to a wide variety of REITs, so you don’t have to choose whether to focus on hotels, healthcare, office, or other types of REITs. Instead, by investing only in the ETF, you get exposure to all of these types of REITs. Retail, healthcare and telecom are the largest REITs, but there are many more REITs in the portfolio.
Another reason you might want to consider investing in the fund is the return. At 3.8%, the ETF pays you more than three times what you would receive with the average stock in the S&P500. However, if you wait too long, those returns can decrease because it depends not only on the dividend you receive, but also on the price you pay for the investment. And if the ETF rises in value, which could happen as more rate cuts occur, those yields will fall.
Investing in a high-yield ETF is a way for investors to provide their portfolios with valuable, recurring cash flow. Plus, it can increase your overall returns. Over the past five years, the ETF’s share price has risen just 6%. However, when you factor in dividend payments, the total return is about 28%. While these returns may not look great, the future could look brighter for the fund and REITs as a whole as interest rates fall even further.
