Our good friend, the U.S. dollar, has had a reversal of fortune given the rise of its index above 85. Almost a year ago, long before the $700 billion rescue package and before the announcements of coordinated central bank activities to ease global credit problems, everyone from fashion models to economists were down on the U.S. dollar.
The dollar's resurgence as a solid store of value may be fleeting, but it is a good example of how investing into bad news can benefit investors positioned to capitalize during market downturns. A pair of real estate ETFs, which most investors will understandably avoid, are still a good idea to review and keep in mind should the downward momentum in real estate reverse. (For more reading on ETFs, check out ETFs: How Did We Live Without Them?)
The Vanguard REIT Index ETF (AMEX:VNQ) deserves attention first since it offers investors a 5.08% dividend yield. The fund also earns high marks for its low 0.10% expense ratio. The major concern is its concentration in retail REITs like its top-holding Simon Property Group (NYSE:SPG). Retail REITs like Simon have been hurt by higher gas prices, job losses and the slowdown in consumer spending.
The slowdown has already caused retail chains like Linens N Things to fail and others like Circuit City (NYSE:CC) to struggle. A turnaround for retail REITs is ultimately tied to a resurgence of consumer spending, but when that will happen is unknown. The VNQ ETF is down 35.5% since the beginning of the year.
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The SPDR DJ Wilshire REIT (AMEX:RWR) also has a relatively attractive yield of 4.78%. As of September 30, it also held the same top three holdings as VNQ with Vornado Realty (NYSE:VNO) and Public Storage (NYSE:PSA) rounding them out. The difference between the two funds is that RWR is overweight in apartments and health care.
The concern here is the threat of job loss. The U.S. Department of Labor reported 299,000 job losses in the third quarter. The job losses limit renters' ability to apply for new apartments, and in severe cases, it causes the owners of apartment buildings to go into default if the tenants cannot make payments. The RWR ETF is down 36.69% since the beginning of the year.
At the close on October 27, the PowerShares DB U.S. Dollar Index Bullish fund (AMEX:UUP) had risen 14.43% since the beginning of the year despite the negative outlook held by most investors.
I'm not saying that the idea surrounding the negative sentiment was without merit, but I would like investors to note that the height of clamoring over the weakening U.S. dollar toward the end of last year may have signaled a bottom. If investors with a high tolerance for risk can adopt a dollar-cost-averaging approach, they can avoid having to guess the bottom and instead open up to the idea of investing into bad news. After all, it was Warren Buffett who said investors should be greedy when others are fearful. (For more on Warren Buffett, check out Warren Buffett: The Road To Riches.)