T
he Vanguard Real Estate ETF could be a winner as interest rates fall, thanks to its sensitivity to rate changes. REITs are particularly vulnerable due to their reliance on borrowed money and the impact of rising rates on commercial property values.

    Historically, REITs have outperformed in falling-rate environments, making them an attractive option now that the Federal Reserve is expected to lower interest rates. Chairman Jerome Powell's recent speech at Jackson Hole cleared the way for this move, potentially starting as early as September.

    The real estate sector has underperformed the S&P 500 significantly over the past decade, with the Vanguard Real Estate ETF delivering a 77% total return compared to the Vanguard S&P 500 ETF's 290%. However, it's not that REITs are doing poorly as businesses – rather, they've been overshadowed by the strong performance of megacap technology stocks and rising interest rates.

    As interest rates rise, investors tend to rotate out of riskier investments like REITs and into safer options. But with falling rates on the horizon, this trend could reverse, benefiting REITs. The sector's dependence on borrowed money makes it particularly sensitive to rate changes, but lower rates can also boost commercial property values and investor confidence.

    With the Fed poised to lower interest rates, now may be an ideal time to invest in the Vanguard Real Estate ETF or other REITs. This could create a more favorable environment for real estate investment trusts, leading to improved growth and performance.