Like many other sectors, real estate experienced a difficult 2018. Despite starting the year with high home prices and impressively low mortgage rates, climbing interest rates ended up deterring buyers. At the same time, 2018 saw home prices fall in many major cities. In the end, the real estate sector closed out the year in the red, even though it did successfully outperform the broader market in general.
Exchange-traded funds (ETFs) focused on the real estate sector pool together real estate securities in order to offer customers broad exposure to the sector. In many cases, these funds focus on real estate investment trusts (REITs), securitized portfolios of properties. REITs allow investors to buy shares and receive dividends based on their investments. In turn, REIT ETFs hold baskets of several of these property-owning companies, providing even greater diversification for investors.
Owing to the overall declines of the real estate sector, many of the best-performing real estate-focused ETFs of 2018 were those employing a strategy which bets against these companies. Bearish funds which aim to short the real estate sector were some of the top returners in 2018. Below, we'll explore the top five leaders in the real estate ETF space for last year. Indeed, these five funds were the only real estate ETFs to eke out positive returns for the year. We'll compare these funds against the benchmark returns of -5.1% seen in the S&P 500 Real Estate Index.
Returns for 2018: +11.3%
Returns for 2018: +9.3%
Returns for 2018: +6.5%
Returns for 2018: +4.8%
Returns for 2018: +1.6%
Direxion Daily Real Estate Bear 3x Shares
The top-performing real estate ETF of 2018 was the Direxion Daily Real Estate Bear 3x Shares fund (DRV). This fund takes an aggressive inverse strategy, providing 3x leveraged inverse exposure. The underlying index of DRV is made up of market-cap-weighted large U.S. REITs, all of which are taken from the MSCI US Investable Market 2500 Index. As the name indicates, DRV provides daily -3x exposure, and it is rebalanced each day. As of the start of trading for the new year, DRV was up more than 11.3%. At the same time, the fund is down close to 30% for the trailing five year period as of this writing; this is an indicator that DRV is intended as a short-term investment vehicle to capitalize on drops in the REIT space.
DRV was launched in 2009 and carries an asset base of $21.4 million. It is an expensive ETF, with an expense ratio of 1.09%.
ProShares Ultra Short Real Estate
The second REIT ETF for 2018 in terms of overall returns is the ProShares Ultra Short Real Estate fund (SRS). Heading into the new year, SRS had made overall gains of more than 9% throughout 2018. In many respects, SRS functions similarly to DRV. Rather than -3x exposure to the REIT space, however, SRS offers -2x exposure. It also focuses on the Dow Jones U.S. Real Estate Index as opposed to the MSCI index indicated above. The Dow Jones index includes not only REITs but also non-REIT real estate companies as well. Similar to DRV, SRS is intended to be a short-term trading vehicle which is rebalanced on a daily basis.
Launched in January of 2007, SRS is similarly sized to DRV, with assets under management of about $24 million. It shares a high price tag as well, with an expense ratio of 0.95%.
ProShares Short Real Estate
The ProShares Short Real Estate ETF (REK) returned more than 6% for the year heading into January of 2019. REK is very similar to its more aggressive sibling, SRS. The primary distinction between them is leverage; REK is not a levered fund, providing inverse exposure to the Dow Jones U.S. Real Estate Index. Like SRS, REK is rebalanced daily. With only just under $10 million in assets under management, REK is a small fund, with a relatively wide spread. Still, although REK's long-term returns are difficult to assess, the fund can provide a nice return in times of economic turmoil which influence the real estate sector.
REK was launched in March of 2010 and has an expense ratio of 0.95%.
Long-Term Care ETF
Unique among the ETFs on this list is the Long-Term Care ETF (OLD). With returns of close to 4.8% for 2018, OLD was the fourth-strongest returner of the year. OLD focuses on products and services required by individuals who are aging. It is heavily exposed to REITs which deal in senior housing, but it is not limited exclusively to real estate. It also tends to hold names which provide additional goods and services to senior housing facilities, such as employment services.
OLD was launched in June of 2016 and has an expense ratio of 0.50%.
iShares Residential Real Estate ETF
Although it returned under 2% for 2018, REZ was nonetheless one of the top performers in an ETF segment that struggled to eke out positive returns last year. The iShares Residential Real Estate fund focuses on an index, weighted by market cap, of U.S. health care, self-storage, and residential REITs. In this way, REZ's name is somewhat misleading: the fund focuses on a variety of different subcategories within the real estate sector. With daily trading volumes close to $2 million and an asset base of just over $315 million, the fund is reasonably liquid.
REZ was launched in May of 2007 and has an expense ratio of 0.48%.