T
he Vanguard Real Estate ETF could be a winner as interest rates fall, benefiting from the rate-sensitive nature of real estate investment trusts (REITs). REITs have historically outperformed in falling-rate environments and have underperformed the S&P 500 significantly over the past decade. The Vanguard Real Estate ETF delivered a 77% total return compared to the Vanguard S&P 500 ETF's 290%.

    The underperformance of REITs isn't due to poor business performance, but rather two factors: the strong performance of megacap technology stocks and interest rates. As interest rates rise, borrowing becomes less attractive for REITs, commercial property values decline, and investors rotate out of riskier investments like REITs.

    However, with the Federal Reserve expected to lower rates, a falling-rate environment could create a better growth environment for REITs, causing investors to rotate money into the sector. This could be an upward catalyst for REIT stocks, including the Vanguard Real Estate ETF.

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