By Mark Hulbert, MarketWatch
It’s probably easier to say what not to do. For starters, note carefully that the historical results presented here reflect residential real estate. Commercial real estate is an entirely different kettle of fish, as we’ve seen over the last year as the work-from-home movement has inflicted horrible losses on that sector. Most of the publicly traded real-estate investment trusts invest heavily in commercial real estate, and the same goes for the exchange-traded funds that focus on real estate.
In fact, I couldn’t find any REITs or real estate ETFs whose returns are significantly correlated with the Case-Shiller U.S. National Home Price index. That doesn’t mean you should automatically avoid these REITs and ETFs. But you can’t justify doing so on the basis of the history presented in this column.
One way to invest directly in the residential real-estate asset class is by purchasing one of the futures contracts on the CME that are benchmarked to the Case-Shiller U.S. National Home Price index. Note carefully, however, that the market for these contracts is extremely thin. Because of this, their prices can exhibit a lot of short-term volatility having more to do with the presence or absence of bids or offers than with the performance of the Case-Shiller Index itself.
For example, at the end of last year’s first quarter, the spot contract for the Case-Shiller futures contract was trading at 232.80, and at the end of May at 233. But during April the contract fell to 210 before jumping just as quickly back to where it was before. This volatility likely was due more to the market’s illiquidity than to anything else.
Another limitation to investing in Case-Shiller futures: The longest-maturity contract is just five years out. And, given the illiquidity of the market for these futures, you bear the not-inconsiderable risk of having to roll a maturing contract into a subsequent one at unfavorable prices.
At a minimum, if you are even considering the futures market to establish your residential real-estate exposure, be sure to consult a qualified adviser.
Absent that, your best residential real-estate investment option would appear to be your home or other individual home properties. Just know that you will inevitably incur lots of idiosyncratic risk with those investments. Nevertheless, the history of the Case-Shiller index suggests that you should at least consider incurring that risk.
Notice that this discussion doesn’t take into account taxes or any of a number of other estate and financial planning considerations. As always, consult with a qualified financial adviser before making any big changes.