Real Estate ETFs Bounce From Key Support

Logistics and telecommunications infrastructure support REIT growth

A recent pullback in real estate exchange-traded funds (ETFs) provides an opportunity for swing traders to join the momentum in one of this year's better-performing sectors. Most funds that track the group invest in real estate investment trusts (REITs), which are companies that own and operate real estate to generate income.

REITs look well posited to keep performing into 2020 provided economic growth remains stable and the Fed keeps interest rates comparatively low. A healthy economy ensures that landlords can keep gradually increasing rent, while access to cheap money through lower rates helps real estate owners service property debt. Moreover, given that REITs pass 90% of their net earnings to investors in the form of dividends, they become more appealing when bond yields fall.

While e-commerce and high-profile mall anchor bankruptcies have undoubtedly taken their toll on retail REITs, the growing need for logistics infrastructure and fulfillment centers to satisfy online order demand continues to create opportunities. Furthermore, the rise in cloud computing, the internet of things (IoT), and artificial intelligence (AI) bodes well for third-party telecommunication infrastructure and data-center REITs.

Those who want to buy the dip in real estate REIT ETFs should consider the three funds outlined below. Let's review the metrics of each and work through several trading possibilities.

Direxion Daily MSCI Real Estate Bull 3X Shares (DRN)

With assets under management (AUM) of $64.77 million, the Direxion Daily MSCI Real Estate Bull 3X Shares (DRN) aims to return three times the daily performance of the MSCI US IMI Real Estate 25/50 Index. The benchmark comprises both large- and small-cap REITs and stipulates that all allocations with a weighting above 5% cannot exceed 50% of the index. DRN, through its leveraged exposure, provides a suitable instrument for those who want to take an aggressive short-term bet on the U.S. real estate market. Traders should consider using limit orders to combat the fund's wider 0.43% average spread and sometimes sluggish share turnover. While the ETF's 1.04% expense ratio sits on the pricey side, it doesn't overly affect active trading. As of Nov. 27, 2019, the fund offers a 1.59% dividend yield and has gained 72.21% year to date (YTD).

Since the 50-day simple moving average (SMA) crossed above the 200-day SMA in early March to generate a "golden cross," buy signal, DRN shares have continued to trend steadily higher. Over the past nine months, pullbacks to the dotted blue trendline have provided solid support. Therefore, November's retracement to this closely watched trendline offers swing traders a high-probability entry point. Those who take a position should place a stop-loss order beneath the Nov. 23 low at $28 and think about taking profits near the 52-week high at $32.43.

Chart depicting the share price of the Direxion Daily MSCI Real Estate Bull 3X Shares (DRN)

ProShares Ultra Real Estate (URE)

The ProShares Ultra Real Estate (URE) has an objective to provide two times the daily return of the Dow Jones U.S. Real Estate Index. The fund's underlying index consists of companies and REITs that invest in residential, apartments, office, and retail properties. Trading wise, daily dollar volume liquidity of over $1 million coupled with an average dime spread makes the 12-year-old ETF a suitable choice for those looking to take a geared bet on U.S. real estate. Traders should note that the fund's rebalancing mechanism makes returns for greater than one day unpredictable due to the effects of compounding. URE controls net assets of $151.56 million, charges a 0.95% management fee, and sports a YTD gain of around 50% as of Nov. 27, 2019. The fund yields 1.05%.

The URE share price has remained in an orderly uptrend since March, with the 50-day SMA and a trendline providing a floor for the majority of recent dips. This month's retracement to the still-in-play trendline also finds added support from the June and July swing highs in the form of previous resistance now becoming support. Traders who buy at current levels should set a stop order somewhere below $82.50 and aim to lock in profits on a move that represents at least two times risk. For instance, those who use a $4.10 stop (the difference between Tuesday's $86.60 closing price and $82.50) should set a profit target near $94.80.

Chart depicting the share price of the ProShares Ultra Real Estate (URE)

iShares U.S. Real Estate ETF (IYR)

Launched back in 2000, the iShares U.S. Real Estate ETF (IYR) tracks the performance of the Dow Jones U.S. Real Estate Index, offering traders a vanilla unleveraged instrument for following the sector. Within the REIT space, the $4.7 billion fund tilts toward specialized, residential, and retail properties, with respective percentage allocations of 31.55%, 14.72%, and 11.20%. Cell tower owner American Tower Corporation (AMT) takes the top stock weighting at 7.50%. Traders enjoy tight penny spreads and ample liquidity, with more than 6 million shares exchanging hands per day. As of Nov. 27, 2019, IYR issues a 2.57% dividend yield and has returned 25.53% on the year. By comparison, the average S&P 500 company has gained 25.28% and yields 1.88%.

As IYR tracks the same underlying index as URE, both charts look remarkably similar. This month's second tag of the uptrend line that has been in play since the first quarter allows traders to enter the stock on a countertrend move. The relative strength index (RSI) gives a reading well below overbought territory, providing ample room for the price to test higher prices before consolidating. Because the fund charges a lower management fee, consider using a trailing stop to let profits run. To apply this exit technique, place an initial stop under the November swing low and raise it under each successive ascending trough.

Chart depicting the share price of the iShares U.S. Real Estate ETF (IYR)
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