In the nearly two years since our initial recommendation, Growth Portfolio holding Guggenheim China Real Estate (NYSE: TAO) has suffered tremendous volatility, with swings between gains and losses on an almost monthly basis.

Chinese monetary policy has been a major factor in that performance. In early 2010, China’s policymakers were pursuing an accommodative approach to monetary policy in order to insulate the country against the effects of the global economic crisis. The resulting environment of low interest rates and widely available credit drove major gains in Chinese real estate.

However, as a speculative bubble formed in China’s real estate market, the government began scaling back real estate lending and pushing up borrowing costs. Those actions led to a substantial slowdown in China’s real estate market.

Additionally, China’s economic growth has begun to slacken. Investor concern about China’s slower growth is likely to continue weighing heavily on the Chinese real estate market. And with real estate sales weakening in most of China’s major markets, the sector will have difficulty developing upside momentum.

With an uncertain outlook and growing volatility, we’re selling our position in Guggenheim China Real Estate.

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But we’re not exiting real estate altogether.

In the US, multifamily real estate investment trusts (REIT) have actually been major beneficiaries of the real estate crash and ensuing credit crisis.

In response to the downturn, banks and other lenders significantly reduced their mortgage lending. The decline in mortgage lending has hit the 20- to 34-year-old demographic particularly hard. In the past, most Americans in this age group would be set to buy their first home. But banks’ stringent lending standards have relegated much of this group to the rental market.

That trend has been a boon for US multifamily REITs, especially mid- to upper-tier REITs operating in expensive real estate markets.

So while our play on Chinese real estate did not work out as we’d intended, we still believe there’s opportunity in real estate. As such, we’re adding iShares FTSE NAREIT Residential Plus Capped Index Fund (NYSE: REZ) to our Growth Portfolio this month.

With our positive outlook on US multifamily REITs, buy iShares FTSE NAREIT Residential Plus Capped Index Fund under 50.

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