ETF News: Vangaurd Group’s REIT ETF Is Long Term Value Opportunity

ETF News: Why Vanguard Group’s REIT ETF Is Both A Short Term Swing And Long Term Value Opportunity

  • Summary of the ETF’s portfolio, assets, and allocation.
  • Explanation of the resistance after reaching pre-crisis price levels.
  • The S&P/Case-Shiller US National Home Price Index looks well aligned for growth in upcoming months.
  • Algorithmic analysis explaining the short term opportunity of this long term value investment.

Portfolio characteristics and structure

The Vanguard Group manages many ETFs, however one particularly stands out as a simple short term opportunity. Vanguard REIT ETF (NYSEARCA: VNQ) is a sector specific real estate ETF. The fund diversifies into various real estate sectors. After closing January at an all-time high of almost $90, shares have recently dropped and are now trading at around $81. The ETF’s average annual return since inception is 10.11%; however, the last 5 years averaged 17.5%. The annual expense ratio is currently just 0.10%.

Below you can see the allocation into various REIT sectors.

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These are divided into 141 stocks, with the net assets being valued at slightly over 52 billion. The 10 largest holdings which represent 38% of the equity are listed below.

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The Pre-Bubble Price Level Resistance

The financial crisis and real estate bubble, in my opinion, create a major line of resistance. As can be seen below, just recently the ETF breached price levels previous to the crisis – right before declining about 8% in the last 3 months.

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In comparison, the recently launched Fidelity MSCI Real Estate Index ETF (NYSEARCA:FREL), the passively-managed ETF lost 4% since debuting on feb 6th (VNQ went down 3.5% in the same period), contradicting high hopes and expectations. This contradicts the idea that investors irrationally are avoiding these price levels because of the bubble and history of this sector. Both arguments make a case, each has to judge for himself.

The S&P/Case-Shiller US National Home Price Index rose 15% in the last 2 years. The last stagnation was 6 months long between September 2013 and January 2014. If this stagnation period is similar in time we should now see prices hike up again follow august 2014’s trend reversal, which will have a positive effect on Vanguard’s REIT ETF.

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Although the ETF experienced over $50 million of outflow in recent months, the funds solid historical record, low fees and strong future positioning make it an attractive value investment. However, right now the ETF offers a nice swing opportunity – investors can expect some sweet short term returns from price appreciation, followed by dividends and value growth in the long term. This is mainly caused by the weak demand leading to the shares being traded below what is deemed a fair net asset value. We use an algorithmic system in order to measure the current pressure on the ETF to rise in value within the next month.

Algorithmic Swing Analysis

I Know First Market Prediction System models and predicts the flow of money between the markets. The algorithm produces a forecast with a signal and a predictability indicator. The signal is the number in the middle of the box. The predictability is the number at the bottom of the box. At the top, a specific asset is identified. This format is consistent across all predictions.

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The signal represents the predicted movement direction or trend, and is not a percentage or specific target price. The signal strength indicates how much the current price deviates from what the system considers an equilibrium or “fair” price. The signal can have a positive (predicted increase) or negative (predicted decline) sign. The heat map is arranged according to the signal strength with strongest up signals at the top, while down signals are at the bottom. The table colors are indicative of the signal. Green corresponds to the positive signal and red indicates a negative signal. A deeper color means a stronger signal and a lighter color equals a weaker signal.

The predictability indicator measures the importance of the signal. The predictability is the historical correlation between the prediction and the actual market movement for that particular asset, which is recalculated daily. Theoretically the predictability ranges from minus one to plus one. The higher this number is the more predictable the particular asset is. If you compare predictability for different time ranges, you’ll find that the longer time ranges have higher predictability. This means that longer-range signals are more important and tend to be more accurate.

Below you can see and example of the most recent ETF forecast, which identifies Vanguard REIT ETF as trading below fair value.

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The 14 days and 1 month forecast identifies Vanguard REIT ETF with a strong likelihood of appreciating in these time horizons, identified by the signals 18.9 and 17.01 respectively.

The combination of a short term opportunity with solid fundamentals and track record present this ETF as a truly attractive opportunity. Investors interested in real estate should strongly consider it as a part of their portfolio.