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Inverse real estate investment trust (REIT) exchange-traded funds (ETFs) aim to provide investors with short exposure to a basket of securities in the real estate sector. REITs are companies that own, operate, or finance income-generating real estate and offer investors a way to invest in the real estate sector without having to buy or manage property themselves.
Investors who are bullish on the real estate sector can use a REIT ETF to invest in a basket of REITs. But investors with a bearish outlook have the option of putting their money in inverse REIT ETFs.
Key Takeaways
- Inverse real estate investment trust (REIT) exchange-traded funds (ETFs) have significantly outperformed the market in the past year, though sophisticated investors use these ETFs primarily as short-term instruments.
- The ETFs with the best one-year trailing total returns are SRS, DRV, and REK, but the best gauge of their performance is their daily returns.
- These ETFs provide short exposure to the securities tracked by either the Dow Jones U.S. Real Estate Index or the Real Estate Select Sector Index. All three ETFs use a variety of swaps to provide bearish exposure to the industry.
Traditional ETFs gain when their underlying index rises in price. However, inverse ETFs gain when the underlying index falls. They employ financial derivatives, such as index swaps, to provide short exposure for investors seeking to profit during a decline in the sector, or in a steeper downdraft such as a bear market.
Inverse ETFs can be riskier investments than non-inverse ETFs, because they are only designed to achieve the inverse of their benchmark’s one-day returns. You should not expect that they will do so on longer-term returns. For example, an inverse ETF may return 1% on a day when its benchmark falls -1%, but you shouldn’t expect it to return 10% in a year when its benchmark falls -10%. For more information, see this U.S. Securities and Exchange Commission (SEC) alert.
Some inverse REIT ETFs employ leverage, amplifying the short exposure to the underlying index. An inverse REIT ETF that offers -2× leverage will increase 2% when the underlying index falls by 1%. But losses are also amplified, meaning that when the index rises 1%, the inverse REIT ETF offering -2× leverage falls 2%.
Leveraged ETFs can be riskier investments than non-leveraged ETFs, given that they respond to daily movements in the underlying securities that they represent, and losses can be amplified during adverse price moves. Furthermore, leveraged ETFs are designed to achieve their multiplier on one-day returns, but you should not expect that they will do so on longer-term returns. For example, a 2× ETF may return 2% on a day when its benchmark rises 1%, but you shouldn’t expect it to return 20% in a year when its benchmark rises 10%. For more details, see this SEC alert.
Three distinct inverse REIT ETFs trade in the U.S. There is no benchmark for these ETFs, as each one targets investment results on a daily basis. But for reference on how the overall real estate market and the broader equity market have performed, the S&P 500 Real Estate Sector Index has provided a total return of -12.8% over the past year while the S&P 500 has provided a total return of -12.2%, as of Sept. 2, 2022. The best-performing inverse REIT ETF, based on performance over the past year, is the ProShares UltraShort Real Estate ETF (SRS).
We examine the three inverse REIT ETFs below. All numbers below are as of Sept. 6, 2022. In order to focus on the funds' investment strategy, the top holdings listed for each ETF exclude cash holdings and holdings purchased with securities lending proceeds except under unusual cases, such as when the cash portion is exceptionally large.
ETFs with very low assets under management (AUM), less than $50 million, usually have lower liquidity than larger ETFs. This can result in higher trading costs, which can negate some of your investment gains or increase your losses.
ProShares UltraShort Real Estate (SRS)
- Performance Over One-Year: 17.7%
- Expense Ratio: 0.95%
- Annual Dividend Yield: N/A
- Three-Month Average Daily Volume: 205,773
- Assets Under Management: $56.7 million
- Inception Date: Jan. 30, 2007
- Issuer: ProShares
SRS offers 2× daily short exposure to the Dow Jones U.S. Real Estate Index. The ETF uses a variety of real estate index swaps to provide bearish investors with a return that is -2× that of its index. If the index falls 1% on a given day, then SRS is expected to return 2% on that day, before fees and expenses. The fund resets on a daily basis, resulting in compounding of returns over multiple periods. SRS is intended for sophisticated investors looking to hedge their real estate exposure or for speculating on declines in the real estate market.
Direxion Daily Real Estate Bear 3X Shares (DRV)
- Performance Over One-Year: 13.1%
- Expense Ratio: 0.99%
- Annual Dividend Yield: N/A
- Three-Month Average Daily Volume: 420,672
- Assets Under Management: $122.3 million
- Inception Date: July 16, 2009
- Issuer: Rafferty Asset Management
DRV offers 3× daily short exposure to the Real Estate Select Sector Index, which includes companies involved in real estate management and development as well as REITs. The ETF uses various real estate index swaps to provide bearish investors with a daily return that is -3× the daily performance of its index. If the index falls 1% on a given day, then DRV is expected to rise 3% on that same day. The fund resets on a daily basis, which results in the compounding of returns over multiple periods. DRV is intended for short-term hedging and speculative purposes, not as part of a buy-and-hold strategy.
ProShares Short Real Estate (REK)
- Performance Over One-Year: 10.8%
- Expense Ratio: 0.95%
- Annual Dividend Yield: N/A
- Three-Month Average Daily Volume: 115,408
- Assets Under Management: $42.1 million
- Inception Date: March 18, 2010
- Issuer: ProShares
REK offers daily short exposure to the Dow Jones U.S. Real Estate Index, which has constituents with a range of market capitalizations. The ETF uses various real estate index swaps to provide bearish investors with a daily return that is -1× that of its index. If the index falls by 1% on a given day, then REK is expected to rise 1%. The fund resets on a daily basis, resulting in compounding of returns when held for multiple periods. REK is intended for investors with a high level of tolerance for risk and volatility and is not meant to be held as a long-term investment.
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