Bet Against Real Estate with These Short REIT ETFs


REITs performed quite well in the first four months of the year, as they were buoyed by strong demand for homes and surging confidence of investors on the sector. However, the sector suffered a huge sell-off in May, plunging close to double digits in that time frame, and severely underperformed the overall market. This decline continued for much of June, especially after the FOMC meeting.

At the FOMC meeting, Bernanke indicated that the imminent tapering of QE3 program later this year would raise interest rates. This situation had a huge impact on REITs, largely because REITs are sensitive to any change in interest rates.

The recent talk from the Fed has certainly influenced Treasury bond yields too. The 10-year U.S. Treasury yields soared to more than 2.5% from the 1.6% mark at the start of May.

With the yields increasing, investors may be turning their focus from REITs and considering going short on the space. This is especially true as the appeal for the high yielding securities are waning on the back of fears over the rising interest rates any time soon (read: Forget Dividend ETFs, Focus On Buybacks Instead).

In fact, the three most popular REIT ETFs - iShares U.S. Real Estate ETF (IYR), Vanguard REIT Index ETF (VNQ) and SPDR Dow Jones REIT ETF (RWR) are still down in the trailing two-month period. This can be compared to a decent gain for the SPY in the same time frame, suggesting that REIT ETFs were easily pushing the market lower.

Further, the rising interest rate environment is a growing concern for REITs as investors are concerned about the negative impact on book values and financing costs (read: 3 Sector ETFs to Profit from Rising Rates).

As a result, investors who are bearish on REITs right now may want to consider a near-term short on the space. Fortunately, ETFs offer several options to investors to accomplish this task. Below, we highlight a few of the options, and some of the key differences between each:

ProShares Short Real Estate ETF (REK)

This fund seeks to deliver the inverse (or opposite) return of the daily performance of the Dow Jones U.S. Real Estate Index. The ETF makes a profit when the real estate stocks decline and is suitable for hedging purposes against the fall of these stocks.

The product has amassed over $69.8 million in AUM while volume is light, suggesting additional potential costs in the form of wide bid/ask spread beyond the expense ratio of 0.95%.

ProShares UltraShort Real Estate ETF (SRS)

The fund seeks to deliver twice (2x or 200%) the inverse return of the daily performance of the Dow Jones U.S. Real Estate Index. This benchmark holds about 100 stocks in its basket, spreading out exposure quite nicely various subsectors.

The product has $53.4 million in AUM and average trading volume of nearly 191,000 shares per day. The product does charge 95 basis points a year in fees, putting it in line with others in the space (read: REIT ETFs Crushed: Time to Panic?).

Direxion Daily Real Estate Bear 3x ETF (DRV)

The fund provides daily investment results, before fees and expenses, of three times (3x or 300%) the inverse (or opposite) of the performance of the Real Estate Index. The product creates a leveraged short position in the underlying index through the use of swaps, options, future contracts and other financial instruments.

The ETF is relatively unpopular with AUM of $14.6 million while charging 95 bps in fees and expenses. However, it does see a good level of volume, trading roughly 240,000 shares a day.

Bottom Line

Investors should note that being extremely volatile, these products are suitable only for traders. Additionally, daily rebalancing – when combined with leverage – may lead to returns that are not close to the expected long-term performance figures (see more in the Zacks ETF Center).

Still, for ETF investors who are bearish on real estate in the near term, any of the above products could make an interesting choice. Clearly, many are abandoning the high yielding space, so a near-term short could be intriguing for those with high risk tolerance, and a belief that higher rates are coming, and that the real estate recovery will face some more bumps in the road ahead.

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