3 reverse REIT ETFs in the first quarter of 2022

Reverse Real Estate Investment Trust (REIT) Exchange Traded Fund (ETF) aims to provide investors with short exposure to a basket of securities in the real estate industry. REITs are companies that own, operate or finance income-generating real estate, providing investors with a way to invest in the real estate industry without the need to purchase or manage real estate by themselves.

Investors who are optimistic about the real estate industry can use REIT ETFs to invest in a basket of REITs. But investors with a bearish outlook can choose to invest money in a reverse REIT ETF.

Key points

  • In the past year, the performance of reverse REIT ETFs has lagged far behind the market, although sophisticated investors mainly use these ETFs as short-term tools.
  • The best ETFs that track total returns in a year are REK, SRS, and DRV, but it is best to measure their performance in terms of daily returns.
  • These ETFs provide short positions in securities tracked by the Dow Jones US Real Estate Index or the MSCI US IMI Real Estate 25/50 Index.

Traditional ETFs profit when the price of their underlying index rises. However, when the underlying index falls, the inverse ETF will rise. They use financial derivatives, such as index swaps, to provide short exposure to investors who seek to profit from a more severe decline such as a decline in the industry or a bear market.

Compared to non-inverted ETFs, inverted ETFs may be riskier investments because they only aim to achieve the reverse of their benchmark one-day return. You should not expect them to do this in terms of long-term returns. For example, an inverse ETF may return 1% in a day when its benchmark falls by -1%, but you should not expect it to return 10% in a year when the benchmark falls by -10%. For more information, see this U.S. Securities and Exchange Commission (SEC) alert.

Some inverse REIT ETFs use leverage to amplify short exposure to the relevant index. When the underlying index drops by 1%, the reverse REIT ETF with -2 times leverage will increase by 2%. But the loss is also magnified, which means that when the index rises by 1%, the reverse REIT ETF with -2x leverage falls by 2%.

Leveraged ETFs may be riskier investments than unlevered ETFs because they will react to the daily changes in the underlying securities they represent, and losses may be magnified during adverse price changes. In addition, leveraged ETFs are designed to achieve a multiplier of their one-day returns, but you should not expect them to achieve long-term returns. For example, a 2× ETF may return 2% in a day when its benchmark rises by 1%, but you should not expect it to return 20% in a year when its benchmark rises by 10%. For more details, please refer to this SEC alert.

Three different reverse REIT ETFs are traded in the United States. There is no benchmark for these ETFs because each ETF targets investment results every day. But as a reference for the overall REIT market and the broader stock market performance, the FTSE NAREIT All-Stock REITs Index has a total return of 31.4% in the past year, while the S&P 500 has a total return of 28.4%, as shown below in 2021 November 26th. Based on the performance of the past year, the best performing reverse REIT ETF is ProShares Short Real Estate (REK). We examine the three reverse REIT ETFs below. All figures below are as of November 26, 2021.

ETFs with very low assets under management (AUM) (less than US$50 million) are generally less liquid than large ETFs. This may result in higher transaction costs, thereby offsetting part of your investment income or increasing your losses.

  • Performance over one year: -25.1%
  • Expense rate: 0.95%
  • Annual dividend yield: Not applicable
  • Three-month average daily volume: 12,546
  • Assets under management: US$9.4 million
  • Date of establishment: March 18, 2010
  • Publisher: ProShares

REK provides daily short positions on the Dow Jones U.S. Real Estate Index, which has 86 constituent stocks with different market capitalizations. ETFs use various real estate index swaps to provide bearish investors with a daily return of -1 times its index. If the index falls by 1% on a certain day, REK is expected to rise by 1%. The fund is reset every day, resulting in compound returns when held over multiple periods. It is suitable for investors who have a high tolerance for risks and volatility, and is not intended to be held as a long-term investment.

  • Performance over one year: -45.0%
  • Expense rate: 0.95%
  • Annual dividend yield: Not applicable
  • Three-month average daily volume: 27,205
  • Assets under management: $15.7 million
  • Date of Establishment: January 30, 2007
  • Publisher: ProShares

SRS provides 2 times the daily short position of the Dow Jones U.S. Real Estate Index. The ETF uses various real estate index swaps to provide bearish investors with a return of -2 times its index. If the index drops by 1% on a given day, the fund expects a 2% return on that day before deducting fees and expenses. The SRS is reset every day, resulting in multiple periods of return compounding. It is suitable for sophisticated investors who want to hedge their real estate risks or speculate on the decline in the real estate market.

  • Performance over one year: -61.2%
  • Expense rate: 1.08%
  • Annual dividend yield: Not applicable
  • Three-month average daily volume: 35,752
  • Assets under management: US$20.6 million
  • Date of establishment: July 16, 2009
  • Publisher: Rafferty Asset Management

DRV provides 3 times daily short positions for the MSCI US IMI Real Estate 25/50 Index, which is an index of all market capitalization components of the US real estate industry. The ETF uses various real estate index swaps to provide bearish investors with a daily return of -3 times the daily performance of its index. If the index drops by 1% on a certain day, then DRV is expected to rise by 3% on the same day. The fund is reset every day, which leads to compounding of returns over multiple periods. It is intended for short-term hedging and speculation purposes, not as part of a buy and hold strategy.

The comments, opinions and analysis expressed here are for reference only and should not be regarded as personal investment advice or advice on investing in any securities or adopting any investment strategy. Although we believe that the information provided here is reliable, we do not guarantee its accuracy or completeness. The views and strategies described in our content may not be suitable for all investors. Due to the rapidly changing market and economic conditions, all comments, opinions and analyses contained in our content are presented on the date of publication and may change without notice. This material is not intended to provide a complete analysis of every important fact about any country, region, market, industry, investment or strategy.

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