Inverse REIT ETFs aim to provide investors with short exposure to a basket of securities in the real estate sector. Real estate investment trusts (REITs) are companies that own, operate, or finance income-generating real estate and provide investors a way to invest in the real estate sector without having to buy or manage property themselves. Investors bullish on the real estate sector can use a REIT exchange-traded fund (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 REIT ETFs underperformed the broader market over the past year.
  • The ETFs with the best 1-year trailing total return are REK, SRS, and DRV.
  • These ETFs provide short exposure to the securities tracked by either the Dow Jones U.S. Real Estate Index or the MSCI U.S. REIT Index.

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, in order 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 details, see this SEC alert.

Some inverse REIT ETFs employ leverage, amplifying the short exposure to the underlying index. An inverse REIT ETF that offers -2x 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 -2x leverage falls 2%.

Leveraged ETFs can be riskier investments than non-leveraged ETFs given that they respond to daily movements in the underlying securities 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 2x 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.

The inverse REIT ETF universe is comprised of just 3 ETFs. Inverse REIT ETFs have dramatically underperformed the S&P 500's total return of 23.9% over the past 12 months. The best-performing inverse REIT ETF over the past year is the ProShares Short Real Estate (REK). We examine the 3 best (and only) inverse REIT ETFs below. All numbers in this story are as of August 27, 2020.

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 Short Real Estate (REK)

  • Performance over 1-Year: -7.0%
  • Expense Ratio: 0.95%
  • Annual Dividend Yield: 0.63%
  • 3-Month Average Daily Volume: 56,074
  • Assets Under Management: $21.6 million
  • Inception Date: March 16, 2010
  • Issuer: ProShares

REK offers daily short exposure to the Dow Jones U.S. Real Estate Index, which has more than 100 constituents ranging in size from small cap to large cap. The ETF uses various real estate index swaps to provide bearish investors a daily return that is -1x 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. 

ProShares Ultra Short Real Estate (SRS)

  • Performance over 1-Year: -26.1%
  • Expense Ratio: 0.95%
  • Annual Dividend Yield: 1.25%
  • 3-Month Average Daily Volume: 342,915
  • Assets Under Management: $35.9 million
  • Inception Date: January 30, 2007
  • Issuer: ProShares

SRS offers 2x daily short exposure to the Dow Jones U.S. Real Estate Index. The ETF uses a variety of real estate index swaps to provide investors bearish on the real estate sector a return that is -2x that of its index. If the index falls 1% on a given day, then the fund is expected to return 2% on that day, before fees and expenses. SRS resets on a daily basis, resulting in compounding of returns over multiple periods. 

Direxion Daily Real Estate Bear 3x Shares (DRV)

  • Performance over 1-Year: -51.3%
  • Expense Ratio: 1.10%
  • Annual Dividend Yield: 2.30%
  • 3-Month Average Daily Volume: 370,300
  • Assets Under Management: $41.0 million
  • Inception Date: July 16, 2009
  • Issuer: Direxion

DRV offers 3x daily short exposure to the MSCI U.S. IMI Real Estate 25/50 Index, an index of all market cap segments of the U.S. real estate sector. The ETF uses various real estate index swaps to provide bearish investors with a daily return that is -3x the daily performance of its index. If the index falls 1% on a given day, 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.