Experts Warn of Looming Real Estate ETFs

For years, investors have been chasing yields. With bank interest rates under 1%, investors have been scouring the market looking for better rates of return and Wall Street has been happy to respond.

Long gone are the days when investors looking for income had just a few choices – bonds, preferred stock or Treasuries. Now there is a multitude of investment choices available including real estate ETFs. According to InvestmentNews, one popular real estate ETF has been iShares Mortgage Real Estate Capped ETF (REM). With a yield of 14%, the fund has lured in hundreds of millions of dollars of new capital.

(If you think 14% is too good to be true, consider ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN. Its yield is a whopping 27%.)

Good things generally don’t last forever and many real estate ETFs and REIT funds are about to learn that lesson.

The Federal Reserve hasn’t had a rate hike in many years. Most everyone agrees that is soon to change however. Many real estate ETFs and REITs are very yield sensitive. That means when (not if) interest rates rise, these securities will tumble in value.

Sophisticated investors fully understand the risks they take when making these investments. One blip in interest rates and the value of your investment could plummet.

Unfortunately, some stockbrokers and financial advisors have been selling these risky investments to the elderly and retirees. People who are risk adverse. We spoke with one investor who says she was told that her ETF was backed by “real estate”. It wasn’t. Her fund invested in other companies that invested in mortgage backed securities.

Many of the same people who are seeking income are actually conservative investors. Stockbrokers have a duty to fully understand their client’s investment objectives and risk tolerance. An elderly investor who seeks income and preservation of capital and who is risk adverse has no business in many of the real estate ETF products.

The market has enjoyed a long bull run. The Fed hasn’t raised interest rates in almost 10 years. When the market falters, however, many of the people who have believe they are safely invested are in for a painful surprise.

If you lost money to a bad stockbroker or believe you received bad advice, give us a call. Most investment fraud cases can be handled on a contingent fee basis. Even if your broker leaves the business or has no insurance, his or her employer (brokerage firm) is still responsible for your losses.

About the author: Brian Mahany is a lawyer and author and frequent contributor to REIT Loss Recovery.

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