In real estate, the three keys are location, location and location. But in the case of Charles Schwab's latest ETF Investor Snapshot, the keys are real estate and more real estate.
First, the macro trend: Investors are buying sector funds.
Assets held in sector ETFs at Schwab have grown 49% in the past year. That compares to the increase of 35% in overall ETF assets held at Schwab, which totaled $146 billion at the end of September, according to Beth Flynn, head of ETF platform management.
Investors are flocking to sector ETFs because they share the benefits of ETFs generally in terms of diversification, low costs, and liquidity, said Flynn. Buyers can diversify their holdings by buying specific slices of the economy.
"The ability to have that targeted but yet diversified exposure has been attractive to the buy-and-hold investors because it gives them an opportunity to fine tune their portfolio. For our active trader clients, they can have an opinion on a particular sector instead of a particular security, which provides a little bit more diversity for them," she said.
Now, the micro trend: The hottest sector is real estate.
Funds that invest in global and domestic real estate are the big draw for most investors, according Flynn. "Active traders are a little more interested in the miscellaneous categories like home building but it's definitely a real estate story right now within sector ETFs," she said.
"We have seen a lot of interest in real estate as (we) go out and speak to clients," said Brad Sorenson, director of market and sector analysis at the Schwab Center for Financial Research.
Why? Because a comeback in real estate prices appears imminent. Applications for building permits in September 2012 were at a seasonally adjusted annual rate of 894,000, up 11.6% from the revised August rate and up 45.1% from September 2011, according to data from the U.S. Department of Commerce. The number of homes that were started last month were at a seasonally adjusted annual rate of 872,000, up 15.0% from the revised August estimate and up 34.8% from September 2011.
And privately-owned housing completions in September were at a seasonally adjusted annual rate of 683,000 and is 13.8% above the September 2011 rate of 600,000.
However, Sorenson cautioned against making real estate a one size fits all type of investment.
"The real estate market is a very diverse market so investors have to be careful about what they're getting into. There is commercial real estate, apartment rental or more home builder residential type of real estate. Home builders have already had a pretty good run at this point in time so we're a little concerned about the potential for a near-term pullback. But overall, for a long-term hold, we're starting to see housing improve quite a bit in the U.S.," he said.
He said that he's a little concerned about the rental market because of relatively high rental rates versus low apartment vacancies. "We could see a little bit of a pullback there but the overall real estate market seems to be improving," he said.
Real estate aside, Sorenson said energy is always an interesting sector for investors partly because they want to offset some of the prices they pay at the pump or through their heating bills. "They figure they can get a little on the other end by investing in those companies," he said.
"Right now we have a relatively neutral view on energy with global growth still slow, especially in China posting some weak economic growth in their recent quarter,'' Sorenson said. "Growth in demand for oil and natural gas will be relatively limited to the near term. In the long term, we're pretty bullish on energy."
Healthcare is another sector that Schwab analysts are bullish on. "It's been an interesting couple of years for healthcare but there's a little bit more certainty with the Patient Protection and Affordable Care Act (commonly referred to as Obamacare) being upheld by the Supreme Court. Some companies have a little bit more certainty of what their futures are going to look like. But there's still going to be some risks there with the elections coming up there could be change," said Sorenson.