Once the commercial property market begins to recover, real estate investment trusts, or REITs, could be the front runner for the asset class. Anton Troianovski for The Wall Street Journal reports that the recovery environment could reflect the 1990s, when many real-estate developers went public to avoid bankruptcy and helped turn real-estate investment trusts into a major force in the property market.

REITs are in a good position to profit from the commercial property bust, but the equity deals that companies made have watered down shareholder stakes in ownership. But this left many REITs in a position to sidestep any loan defaults and benefit when the property market hits trouble.

Meanwhile, hotel shares, which are a staple in REIT investments, have outperformed the broader market. The stocks of hotel companies that are structured as real-estate investment trusts were up 11% during the past three weeks and 34% since the beginning of the year, reports the National Association of Real Estate Investment Trusts.

A.D. Pruitt for The Wall Street Journal reports that such gains far outpace the 6% year-to-date gain for all REITs and the 12% rise by the S&P 500 index. Investors are upbeat about hotel shares because improving credit conditions have allowed some hotel owners and operators to strengthen their balance sheets by refinancing debt or issuing additional stock. Some hotel owners are even walking away from some money pits and giving them to the lenders.

• First Trust S&P REIT Index Fund (FRI): up 10.1% year-to-date

• Dow Jones Wilshire REIT ETF (RWR): up 9.7% year-to-date; hotels are 6.3%

• iShares Cohen & Steers Realty Majors (ICF): up 6.1% year-to-date

For more stories about REITs, visit our REIT category.

REITs own a range of real estate, including office buildings, strip malls and apartment buildings. The sector has a heavy debt load, but if REITs can roll it over, the shares may not suffer. REITs already have rallied about 90% from the 18-year low they hit in March as the drop-off in home prices and economic conditions has slowed, reports Donna Kardos Yesalavich for The Wall Street Journal.

The sector at large saw a huge drop last fall, however, the stocks are anticipated to go nowhere but up if debt refinancings take place. As banks recover more, this is becoming increasingly likely.

Portfolios and managers alike are positive toward REIT shares and ETFs, as they are likely to avoid bankruptcy, and from a technical view, REITs look set to rise as much as 35% from current levels. There are market corrections and pullbacks to be wary of along the way.

• First Trust S&P REIT Index Fund (FRI): up 2.3% year-to-date

• DJ Wilshire REIT ETF (RWR): up 1.4% year-to-date

• iShares Cohen & Steers Realty Majors (ICF): down 0.2% year-to-date

For more stories about REITs, visit our REIT category.

Many investors have been disappointed with the performance of their REIT investments, thanks to both a deep recession and tight lending, explains John Spence for The Wall Street Journal. REITs allow investors to access the commercial real estate market, which involves apartments, storage facilities, skyscrapers and shopping malls.

Is there a bottom in the REIT market, though? Spence has a few points on why the winds may not be turning yet for REITs:

• The poor performance of REITs have to do with credit markets freezing and economic pullbacks. Weak economic fundamentals must be solved before the REITs can turn around.
• REITs have massive amounts of debt they need to roll over or refinance in coming years. Meanwhile, property values and rents are weak, and tenants are falling on hard times.
• According to Fitch Ratings, REITs face tenuous financing available across the capital markets, deteriorating performance in commercial real estate and the sizable overhang of debt maturities for equity REITs looming in 2011.

Although the troubles may seem large, there could also be positives in the real estate markets that will help REITs:

• Investment opportunities can be realized as distressed private operators and banks with bad loans offload properties.
• A possible acquisition boom in REITs may materialize, similar to what happened in the 1990s.
• Investors will be looking for any news on the deleveraging process and economic trends when REITs begin reporting second-quarter results in coming weeks.

• iShares Cohen & Steers Realty Majors Index Fund (ICF): down 16.4% year-to-date



• Vanguard REIT ETF (VNQ): down 13.8% year-to-date

For more stories on REITs, visit our REIT category.

After 100 days of new leadership, it’s time to evaluate the new administration’s progress. In regard to the economy, the banking crisis and the ways Obama will change the financial industry and its relation with real estate will fall under the microscope, NPR reports. NPR also has a timeline of key events so far in the new administration.

On Wall Street, investors were still unsure and mostly unfazed by a new presidency, remarks Jeff Cox for CNBC.

Obama has spent much of his time in office so far trying to right the financial system while boosting consumer confidence, health care, technology and taking some steps to ease the housing crisis. Is it working? There are some signs that the clouds appear to be lifting, but we’re not out of the woods yet.

However, some of the best-performing funds over the last three months are some of the sectors that Obama’s administration has been working to fix, directly or indirectly:

• iShares Dow Jones U.S. Broker-Dealers (IAI): up 28.5% year-to-date

• Broadband HOLDRs (BDH): up 26.7% for the last three months

• SPDR S&P Retail (XRT): up 30.4% for the last three months

While we’re seeing the clouds lift in some areas, there is much room for improvement in many others, including:

• iShares Cohen & Steers Realty Majors (ICF): down 5% in the last three months

• Utilities Select Sector SPDR (XLU): down 13.3% in the last three months

The masses are divided over the administration. They are giving Obama good personal approval ratings but express doubts over policies. The public is almost evenly divided over Obama’s economic reforms, but investors are warming up to the administration’s plans on helping the banking sector and its public-private toxic debt plan.

Obama got dealt a lousy hand. He took office during a recession, a banking crisis, a stock market collapse and rising unemployment. He also had to focus his resources on the root of the problem, the banks. The markets seem to be reacting well to the fact that there now appears to be a more defined plan.

We may have to go back to the well a few times more, but many on Wall Street feel that we may finally be on the road to a recovery.

Next up for Obama will be focusing on jobs – it’s hard to create them and think about them when you’re dealing with a banking crisis. Obama will also have to focus on stemming the tide of foreclosures and personal bankruptcies, as well.

For full disclosure, some of Tom Lydon’s clients own shares of XRT.

Max Chen contributed to this article.

The top area was precious metals, a signal of heavy safe-haven buying. Gold gained about 6%, while silver jumped 8.6%. Gold miners even showed a small gain for the month, up 1.9%.

Other areas of the market didn’t fare so well, though. Financials and real estate took hits: the iShares Cohen & Steers Realty Majors (ICF) fell 32.6%, while the Financial Select Sector SPDR (XLF) lost 26.3%.

For a complete look at the month of February, click through to see our February ETF performance report.

Investors are feeling a bit empowered after the $20 billion shot in Citigroup’s arm and the $306 billion guarantee for risky assets, reports Tim Paradis for Associated Press. Had Citigroup’s share price remained below the key $5 mark, it could have led to a new wave of selling.

Obama has also chosen his financial team and given some hope to the markets, calling in another economic stimulus.

His plan targets saving or creating 2.5 million jobs during the next two years. Any plan is expected to exceed the $175 billion Obama proposed during the campaign.

• iShares Dow Jones U.S. Financial Sector Index Fund (IYF): down 61.7% year-to-date; Citigroup is 4.8%

• Vanguard Financials (VFH): down 60.8% year-to-date; Citigroup 5.1%

On the home front, the nationwide sales of homes fell 3.1%, a number larger than anticipated. The economy and its weakness has made borrowers wary, despite prices falling to their lowest level in five years.

Sales of existing homes fell 3.1% to a seasonally adjusted annual rate of 4.98 million units in October, from a downwardly revised pace of 5.14 million in September, reports Alan Zibel for Associated Press. Sales in the Western region of the nation remain up, as buyers in Las Vegas and Orange County are buying distressed properties at bargain prices.

Nationwide, estimates are that sales of distressed properties made up 45% of all property sales in October.

• iShares Dow Jones Cohen and Steers Realty Majors Index Fund (ICF): down 59.4% year-to-date

• SPDR DJ Wilshire REIT (RWR): down 57.7% year-to-date

Investors have removed $70.7 billion from stock funds in October on top of $56 billion the prior month, reports Jeff Plungis and Sree Vidya Bhaktavatsalam for Bloomberg.

ETFs offer advantages that may help investors reduce capital gain tax bites in their investments. This makes them attractive – especially at a time like this.

Investors are expected to pay taxes on gains even though average mutual funds declined 40% for the year through Oct. 31. It’s a stunning “kick ‘em while they’re down” situation. After taking massive hits to their portfolios all year, investors who are expected to pay capital gains on such drastic losses could find them a very bitter pill to swallow. This could only further damage the trust that investors already are losing in fund companies.

Some of the largest mutual funds out there are seeing big capital gains estimates, despite some having negative performance residing in double digits:

• American Funds EuroPacific (CEUCX): $71.2 billion assets; down 46.9% year-to-date; capital gains distribution estimate of 4-6% of the share price
• American Funds Washington Mutual (CWMCX): $52.9 billion assets; down 37.2% year-to-date; capital gains distribution estimate of 1-3% of the share price
• Fidelity Contrafund (FCNTX): $52.9 billion assets; down 39.9% year-to-date; capital gains distribution estimate of 0.16 cents per share
• Vanguard PRIMECAP (VPMCX): $23.9 billion assets; down 35.8% year-to-date; capital gains distribution estimate of $3.64 per share

If you are holding a fund, you need to understand what could be coming at tax time and decide whether you want to be around for it. You might consider selling the mutual fund and going to a similar ETF instead before a nasty surprise arrives in the mail.

As the stock markets dropped, ETFs saw a net $2.6 billion increase in assets during October. The tax benefits may help explain this phenomenon.

Generally, mutual fund holders are credited at year’s end for mutual fund managers’ stock sales. They pay for the entire year’s gain from individual securities sales. Short-term capital gains are taxed as ordinary income while long-term gains have 15% tax rate, which is scheduled to go up to 20% in 2010.

Losses up to $3,000 can be written off on an investor’s tax return, but losses beyond can only be used or carried over for future years.

At the end of 2007, ETFs held $608.4 billion in assets compared to $12 trillion in mutual funds. As of the end of September 2008, ETFs had $579 billion in assets compared to $10.6 trillion; that’s a 5% loss for ETFs and a 12% loss for mutual funds.

ETFs have fewer transactions per sales of individual stocks than mutual funds, which translates to fewer gains to tax. It is rather uncommon for ETFs to pay capital-gains distributions, but it’s not impossible.

ETFs are not as likely to have to sell securities for investor redemptions whereas mutual-fund investors do. Understanding ETF creations and redemptions illustrates how this is so.

Among certain ETF providers, WisdomTree has announced zero capital gains distributions; State Street Global Advisors will put their estimates up on their website on Nov. 21 and iShares has estimated distributions in two funds: iShares Cohen & Steers Realty Majors (ICF) and Lehman Short Treasury Bond (SHV).

For those considering selling a fund to avoid capital gains, they need to consider the length of their current investments. If it has been held for a long time, then the long-term gains may be more than the short-term distribution which makes it more costly to move.

For information about a specific mutual fund, you can visit the provider’s website. As always, consult your tax professional for specific advice.

New York City commercial real estate transactions have fallen 61% in 2008, hurt by a severe lending slowdown and stoppage. David M. Levitt for Bloomberg explains that about $17 billion of transactions have closed so far and the market is headed for its worst year since 2004.

About 85% of domestic banks tightened lending standards on commercial and industrial loans to large- and mid-size firms in the last three months. The office market is said to be likely to get worse in 2009, and might not see improvements for another year.

Vornado Realty Trust (VNO), however, managed to beat analysts’ earnings projections on gains from the sale of real estate. This is the third-largest U.S. real estate investment trust (REIT), owning about 34 million square feet of office space primarily in New York and Washington. Revenue rose 6.3% in the third quarter, good news amid the gloom for the New York-based firm, Levitt reports.

Vornado benefits from having lower exposure to financial services tenants than other property owners in New York. However, that’s not to say that other tenants are immune from a downturn.

• SPDR Dow Jones Wilshire REIT (RWR): down 29.9% year-to-date; VNO is 5.7%

• iShares Cohen & Steers Realty Majors (ICF): down 31.5% year-to-date; VNO 6.9%

About 220,000 homes were repossessed in the second quarter, triple the number from the same quarter last year, reports Les Christie for CNNMoney. The numbers have caused RealtyTrac to reevaluate its forecast, which had been 1.9 million to 2 million for the year. But not even halfway, there have already been 1.4 million foreclosures.

A government report showed today that single-family home sales were stronger than expected, and inventories shrank to their lowest level in three-and-a-half years. The 0.6% drop in sales was better than what analysts had expected, says Mark Felsenthal for Reuters.

Consumer confidence had been at 28-year lows, but the tax rebates boosted sentiment in July. The consumer confidence index rose to 61.2 in July, up from 56.4 in June. Forecasts had been for no change, reports Pedo Nicolaci da Costa for Reuters. The numbers point to a downturn in spending lasting into 2009, however.

Real estate-related ETFs that could continue to be impacted by the housing crisis:

• Vanguard REIT (VNQ): up 4.2% year-to-date
• SPDR Dow Jones Wilshire REIT (RWR): up 3.7% year-to-date
• iShares Cohen & Steers Realty Majors (ICF): up 3.7% year-to-date
• iShares FTSE/NAREIT Real Estate 50 (FTY): up 2.3% year-to-date
• First Trust S&P REIT (FRI): up 2.6% year-to-date