Exploring Investment Opportunities in REITs as Rate Cuts Approach

With anticipated interest rate cuts on the horizon, now might be a strategic time to invest in an exchange-traded fund (ETF). JPMorgan Chase predicts an additional rate cut in December, with further reductions likely next year, estimating one cut per quarter.

Among the ETFs that could see significant gains is the Vanguard Real Estate Index Fund (NYSEMKT: VNQ). This fund has already enjoyed double-digit growth this year and may be poised for even larger returns in the coming months.

Diverse Exposure Through REITs

Real estate investment trusts (REITs) provide investors with a valuable way to invest in real estate. They generate income through recurring rent payments and can benefit from the increasing value of properties. As interest rates decrease, costs for tenants may drop, reducing the risk of defaults. Lower rates can also stimulate the housing market, driving real estate valuations higher. This scenario suggests that REITs could become excellent additions to a diversified investment portfolio as we enter the next year.

The Vanguard Real Estate Index Fund includes a variety of REITs, eliminating the need to decide between sectors like hotels, healthcare, or offices. Investing in this ETF allows you to access a broad range of industries, as it primarily holds retail, healthcare, and telecom REITs, among others.

High Yield Attraction

A noteworthy aspect of this ETF is its yield. Currently at 3.8%, it offers more than three times the average yield of stocks in the S&P 500. However, waiting too long to invest could be a mistake; the yield may decrease if the ETF’s price rises as anticipated with the rate cuts. Since the yield depends on both the dividend received and the investment cost, an increase in the ETF’s value may lower your return.

Investing in this high-yielding ETF provides new capital through recurring dividends, enhancing overall returns. Over the past five years, the ETF’s price has increased by just 6%. When factoring in dividends, its total return amounts to about 28%. While those numbers might seem modest, the future looks promising for the fund and REITs as interest rates are expected to decline further.

VNQ data by YCharts

A Strategic Buy Heading into 2025?

Whether you seek a reliable dividend or an underrated investment, the Vanguard Real Estate ETF presents a noteworthy option for your portfolio moving into next year. Its low expense ratio of 0.13% ensures that management fees won’t significantly impact the overall returns.

While many stocks are currently priced high and face potential corrections, enthusiasm for REITs has waned in previous years. However, this trend could soon reverse. These investments have struggled in an inflationary environment and under rising interest rates, but they are likely to attract more attention under favorable conditions.

By investing in this ETF before REITs start gaining traction, you might enjoy noteworthy returns while securing a strong dividend—an excellent source of income for years ahead.

Seize This Second Chance for Potential Profit

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Check out these 3 “Double Down” stocks »

*Stock Advisor returns as of November 25, 2024

JPMorgan Chase is an advertising partner of Motley Fool Money. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase and Vanguard Real Estate ETF. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.