Inverse real estate investment trust (REIT) exchange-traded funds (ETFs) are designed to provide investors with short-term exposure to a basket of securities in the real estate sector. REITs are companies that own, operate, or finance income-producing real estate, offering investors a way to invest in the real estate sector without having to purchase or manage the properties themselves.
Investors who are bullish on the real estate sector can use REIT ETFs to invest in a basket of REITs, but those with a bearish outlook have the option of putting their money into an inverse REIT ETF.
Key Takeaways
Real estate investment trust (REIT) inverse ETFs (exchange-traded funds) have significantly outperformed the market over the past year, but sophisticated investors use these ETFs primarily as short-term vehicles. The ETFs with the highest total returns over the past year are SRS, DRV, and REK, but the daily returns are the best indicator of these ETFs' performance. These ETFs provide short exposure to securities tracked by either the Dow Jones U.S. Real Estate Index or the Real Estate Select Sector Index. All three ETFs provide bearish exposure to industries using various swaps.
Traditional ETFs benefit when the underlying index rises, while inverse ETFs benefit when the underlying index falls. Inverse ETFs use financial derivatives such as index swaps to provide short exposure to investors looking to profit during a sharp decline, such as a sector decline or bear market.
Inverse ETFs may be riskier investments than non-inverse ETFs because they only aim to achieve the inverse of the daily return of their benchmark. Don't expect the same long-term returns. For example, an inverse ETF may earn you a 1% return on a day when the benchmark falls -1%, but don't expect to earn a 10% return in a year when the benchmark falls -10%. For more information, see this alert from the U.S. Securities and Exchange Commission (SEC).
Some inverse REIT ETFs employ leverage, amplifying their short exposure to the underlying index. An inverse REIT ETF that offers -2x leverage will gain 2% if the underlying index falls 1%. However, losses are also amplified, so if the index rises 1%, an inverse REIT ETF offering -2x leverage will fall 2%.
Leveraged ETFs may be riskier investments than non-leveraged ETFs because they react to daily fluctuations in the underlying assets they represent, potentially magnifying losses if prices move unfavorably. In addition, while leveraged ETFs are designed to achieve a multiplier on daily returns, you should not expect to achieve a multiplier on long-term returns. For example, a 2x ETF may earn you a 2% return on a day when the benchmark rises 1%, but you should not expect to earn a 20% return over a year when the benchmark rises 10%. See this SEC Alert for more information.
There are three different inverse REIT ETFs trading in the United States. These ETFs do not have a benchmark and each targets a daily investment result. However, as a reference for the performance of the overall real estate market and the broader stock market, as of September 2, 2022, the S&P 500 Real Estate Sector Index has a total return of -12.8% over the past year, while the S&P 500 has a total return of -12.2%. The best-performing inverse REIT ETF based on past year performance is the ProShares UltraShort Real Estate ETF (SRS).
Below, we review three inverse REIT ETFs. All figures below are current as of September 6, 2022. To focus on the investment strategy of the funds, the top holdings for each ETF do not include cash holdings and holdings purchased with securities lending proceeds, except in special cases where the cash portion is unusually large.
ETFs with very small assets under management (AUM) (less than $50 million) are typically less liquid than larger ETFs, which can result in higher trading costs that can negate some of your investment gains or magnify your losses.
1-year performance: 17.7% Expense ratio: 0.95% Annual dividend yield: N/A 3-month average daily trading volume: 205,773 Assets under management: $56.7 million Inception date: January 30, 2007 Issuer: ProShares
SRS provides daily short exposure of 2x the Dow Jones US Real Estate Index. The ETF uses various real estate index swaps to offer bearish investors a return of -2x the index. If the index falls 1% on a given day, SRS can expect a 2% return before fees and expenses on that day. The fund resets daily, compounding returns over multiple periods. SRS is targeted at sophisticated investors who want to hedge their real estate exposure or anticipate real estate market declines.
1-year performance: 13.1% Expense ratio: 0.99% Annual dividend yield: N/A 3-month average daily trading volume: 420,672 Assets under management: $122.3 million Inception date: July 16, 2009 Issuer: Rafferty Asset Management
DRV provides 3x daily short exposure to the Real Estate Select Sector Index, which includes companies and REITs involved in real estate management and development. The ETF uses various real estate index swaps to provide bearish investors with a daily return of -3x the index's daily performance. If the index falls 1% on a given day, DRV is expected to rise 3% on the same day. The fund resets daily, resulting in compounded returns over multiple periods. DRV is intended for short-term hedging and speculative purposes and should not be used as part of a buy-and-hold strategy.
1-year performance: 10.8% Expense ratio: 0.95% Annual dividend yield: N/A 3-month average daily trading volume: 115,408 Assets under management: $42.1 million Inception date: March 18, 2010 Issuer: ProShares
REK provides daily short exposure to the Dow Jones US Real Estate Index, which is comprised of stocks with a range of market capitalizations. The ETF uses various real estate index swaps to provide bearish investors with a daily return of -1x the index. If the index falls 1% on a given day, REK is expected to rise 1%. The fund resets daily, allowing for compounding benefits when held for multiple periods. REK is intended for investors with a high tolerance for risk and volatility and is not intended to be held as a long-term investment.
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