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. According to data from the International Monetary Fund (IMF), China’s gross domestic product (GDP) growth in 2011 was 9.2 percent, marking the first year of single-digit growth in at least a decade. In fact, the IMF has lowered its forecast for Chinese GDP growth in 2012 to 8.25 percent, in line with analysts’ consensus forecast for the nation.

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.

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. Beyond that, consumer finances are in such a precarious state that many potential homeowners can no longer qualify for mortgages. So while mortgage originations have recovered substantially from their 2008 bottom, they remain about 35 percent below pre-recession levels according to data from the Federal Reserve Bank of New York.

Due to elevated foreclosures, slow originations, and consumer deleveraging, mortgages account for a shrinking percentage of American household debt.

Source: US Federal Reserve

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.

While many 20- to 34-year-olds have trouble securing mortgages, data from the Organisation for Economic Co-operation and Development shows that 41.6 percent of them have college degrees. To be sure, the dismal employment market has hardly been welcoming to recent college graduates. But members of the 20- to 34-year-old demographic who were employed prior to the recession were less likely to be hit by job cuts. As a result, their incomes have enjoyed greater stability, and many of them have opted to live in mid- and upper-tier rental communities.

Indeed, REITs such as Equity Residential (NYSE: EQR), AvalonBay Communities (NYSE: AVB) and Home Properties (NYSE: HME) have enjoyed high occupancy rates and attractive growth in rent of between 5 percent and 8 percent over the past few years. In turn, that’s created attractive capital appreciation and dividend growth for US REIT investors.

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.

In addition to the 45 percent of assets allocated to multifamily REITs, the fund’s broad view of the residential real estate market includes holdings such as senior living REITs, self-storage REITs and REITs in the manufactured home business. With its defensive character and attractive 3 percent yield, the exchange-traded fund’s (ETF) total return last year was 16 percent versus the S&P 500’s paltry 2.2 percent return. Even better, the ETF’s yield is expected to rise further over the course of this year.

With $176.5 million in assets, iShares FTSE NAREIT Residential Plus Capped Index Fund is the largest available ETF focusing on residential real estate. And while there are a number of broad REIT ETFs that offer lower management costs, the fund’s 0.48 percent expense ratio is in line with specialty REIT ETFs.

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