One sector that could be worth watching is the real estate investment trusts, or REITs, which have gotten strong ratings and risen rapidly; exchange traded funds (ETFs) can give investors well-diversified exposure to these investments.

In general, an investor who seeks a REIT is concerned with tax advantages, and a high yield. Jim Abbot of A Dash of Insight says that the REIT must return 90% of income to unit holders to avoid taxation at the trust level. Furthermore, the REIT provides smaller investors the opportunity to add real estate of various types to their portfolios without directly buying properties.

When the properties held within the trust depreciate substantially is when the biggest risk is incurred. Commercial real estate has taken the biggest hit since the economy has taken a beating. As of right now, the potential acquisitions are the reason REIT ETFs may have potential.

The leading REITs, such as Simon Property Group (SPG) or Public Storage (PSA), will acquire the senior secured debt, or the mortgage notes securing assets, of their weaker competitors at their current discounted prices and then simply wait for these companies to fall under their their own debt. Well-capitalized companies are in a winning position, and if the target company defaults, the acquirer is in the leading position to take over assets.

  • SPDR Dow Jones REIT (RWR): down 11.9% year-to-date

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.