Real estate investment trusts (REITs) are investment vehicles that own or invest in a variety of income-producing real estate such as apartment buildings, industrial buildings, hotels, hospitals, offices, shopping centers, storage, nursing homes, and student housing. Many exchange-traded funds (ETFs) give investors access to the real estate markets. Fortunately, if investors are bearish and like to bet against the real estate markets, a few ETFs exist for this purpose as well. We've listed three ETFs below that you can use to short the real estate market in varying degrees.

Key Takeaways

  • Inverse investments seek to profit from declines in an underlying index, so investors make money when the underlying benchmark index falls.
  • These investments are usually actively managed and come with high expense ratios.
  • Proshares Short Real Estate Fund seeks to return -1x the daily return of the Dow Jones U.S. Real Estate Index before fees and expenses. 
  • The ProShares UltraShort Real Estate Fund aims to return -2x the daily return of the Dow Jones U.S. Real Estate Index.
  • The Direxion Daily Real Estate Bear 3X ETF is suitable for investors willing to take on high levels of risk. 

What Are Inverse REITs?

When you're looking to profit from declines in the market, you'll probably want to turn to an inverse investment. And REITs aren't exceptions. Inverse REITs are constructed in a way to help investors make money when the underlying benchmark index falls. Designed to magnify the inverse of an index's performance, these assets are also known as short or bear funds. They help investors hedge against declines and are underweight in their exposure to the real estate market segment.

One of the pitfalls to these investments are that they're generally actively managed, which means they usually have higher expense ratios. And because they're actively managed, they're also rebalanced on a regular, consistent basis. This means they tend to underperform the index over the long term.

Inverse investments are generally actively managed and tend to have higher expense ratios.

Proshares Short Real Estate

The Proshares Short Real Estate Fund (REK) seeks to return -1x the daily return of the Dow Jones U.S. Real Estate Index before fees and expenses. The fund achieves this objective by investing in various swaps on the index. As of Sept. 30, 2019, the fund had $7.78 million in assets under management (AUM) and an expense ratio of 0.95%.

Proshares Short Real Estate Fund is heavily weighted in equity REITs, with about 92% of its holdings in this asset class. Mortgage REITs, real estate management and development companies, and professional services make up the rest of its portfolio. With positions in 114 companies, its top five holdings as of Sept. 30, 2019 included:

  • American Tower Group—Class A 
  • Crown Castle International 
  • Prologis
  • Equinix
  • Simon Property Group—Class A 

Since the fund was created on March 6, 2010, it realized an annualized return of -13.06% as of Sept. 30, 2019. The fund returned -15.66% after one year and -10.67% after five years. The fund has lost approximately 21% year-to-date (YTD). Compared to the Dow Jones U.S. Real Estate Index, the fund has a correlation of -0.99 and a beta of -1.0, while against the S&P 500 index, the correlation and beta are 0.48 and -0.6, respectively. Through Sept. 30, 2019, the fund had a standard deviation of 12.43%.

ProShares UltraShort Real Estate

The ProShares UltraShort Real Estate Fund (SRS) aims to return -2x the daily return of the Dow Jones U.S. Real Estate Index. The fund attains this goal by investing in swaps on the index as well as trading swaps on the iShares U.S. Real Estate ETF (IYR). Based on the 2x nature of the fund, if the index declines by 5%, investors in SRS gain 10%. Likewise, if the index increases by 10%, an investor in SRS loses 20%.

The fund reported net assets $17.81 under management as of Sept. 30, 2019, with an expense ratio of 0.95%. Like the Proshares Short Real Estate Fund, about 92% of the fund is invested in equity REITs, while the remaining holdings are invested in mortgage REITs, real estate management and development companies, and professional services. It has positions in 114 different companies, with the top five holdings being American Tower—Class A, Crown Castle International, Prologis, Equinix, and Simon Property Group-Class A. 

The fund was created on Jan. 30, 2007, and has realized a one-year return of -31.13, a five-year return of -21.72%, and -34.14% since inception. Against the fund's index, SRS has a correlation of -0.99 and a beta of -1.99. When calculated against the S&P 500, these values are 0.48 and -1.15, respectively. The fund had a standard deviation of 12.43% through the end of September 2019.

Direxion Daily Real Estate Bear 3X ETF

The Direxion Daily Real Estate Bear 3X ETF (DRV) is suitable for investors who are willing to take on high levels of risk. The fund aims to return -3x the daily return of the Morgan Stanley Capital International (MSCI) U.S. REIT Index. So if the index declines by 5%, an investor in DRV gains 15%. On the other hand, if the index increases by 10%, the investor loses 30%.

As of March 31, 2019, the fund had $13.5 billion in AUM and an expense ratio of 0.95% without factoring in acquired fund fees and expenses. The fund is invested primarily in specialized REITs to the tune of 33%, followed by residential REITs at about 15%. DRV's top five holdings were American Tower—Class A, Crown Castle International, Prologis, Equinix Common REIT, and Simon Property Group REIT.

Since the fund's inception on July 16, 2009, it had a one-year return of -47.94%, a five-year return of -29.37%, and -49.52% since inception. The fund has a correlation of 0.99 and a beta of -2.83 versus the S&P U.S. REIT index. The fund's standard deviation is 43.6%.