At the sector level, real estate is one of the groups believed to be negatively correlated to rising U.S. interest rates. On the other hand, real estate stocks and the related exchange traded funds can help investors gain some portfolio protection as inflation rises.
Real estate investment trusts (REITs) are securities that trade like a stock and invest in real estate directly through property ownership or mortgages. Consequently, revenue are mainly generated through rents or interest on mortgage loans. To qualify for special tax considerations, the asset also distributes the majority of income, about 90% of taxable profits, to investors as dividends.
Aggressive, short-term traders can add some leverage to the real estate trade via ETFs such as the Direxion Daily Real Estate Bull 3x Shares ETF (NYSEArca: DRN). DRN attempts to deliver triple the daily returns of the MSCI US REIT Index. DRN has a bearish cousin, the Direxion Daily Real Estate Bear 3x Shares (NYSEArca: DRV), which attempts to deliver triple the daily inverse returns of that benchmark.
Traders Eye DRN, DRV
Data suggest traders have recently been taking a liking to DRN while departing the bearish DRV.
“Real Estate is another well-known hedge against inflation because property values tend to rise in inflationary environments. It follows the same principle as gold and other commodities; there’s a finite supply and, therefore, increased demand in times of uncertainty,” said Direxion in a recent note. “Investors seem to be making real estate part of their strategy. As of March 15, the Direxion Daily MSCI Real Estate Bull 3X Shares ETF (DRN) had nearly $39 million of inflows in 2018, while the Direxion Daily MSCI Real Estate Bear 3X Shares ETF (DRV) had about $1 million of outflows.”
REITs provide diversification benefits as the asset shows a lower correlation to stocks and bonds. However, the asset category has recently experienced heightened volatility due to interest rate risks. Some investors fear REITs will act negatively in rising interest rate environment. The high dividends in REITs are attractive in a low-rate environment but are less enticing once safer Treasuries show higher rates.
“There will be, of course, other assets that won’t necessarily move in lockstep with the overall market during a correction. But by and large, gold and real estate have historically been the most consistent hedges against volatility. Remember this the next time the market sells off,” said Direxion.
For more information on real estate investment trusts, visit our REITs category.