Real estate stocks and the related exchange traded funds are sensitive to changes in interest and that much is being confirmed this year. The MSCI US Investable Market Real Estate 25/50 Index, a widely followed gauge of real estate investment trusts (REITs) is lower by nearly 6% year-to-date.
With 30-year mortgage rates already surpassing the 5% mark, the cost to finance a home is getting more expensive, clamping down a housing market that has been lagging even as U.S. equities were in the midst of a historic bull run. Compounding the issue is the benchmark U.S. Treasury yield on the 10-year note reaching a new seven-year high.
Slumping REITs increase the allure of the Direxion Daily MSCI Real Est Bear 3X ETF (NYSEArca: DRV). DRV seeks daily investment results equal to 300% of the inverse of the daily performance of the MSCI US REIT Index, which is a free float-adjusted market capitalization weighted index that is comprised of equity REITs that are included in the MSCI US Investable Market 2500 Index. DRV invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse or short leveraged exposure to the index.
Big Tests for DRN ETF
DRV has a bullish counterpart, the Direxion Daily Real Estate Bull 3x Shares ETF (NYSEArca: DRN). DRN attempts to deliver triple the daily returns of the MSCU US REIT Index.
The MSCI US REIT Index also features exposure to Health Care REITs, Hotel & Resort REITs, Industrial REITs, Office REITs, Residential REITs, Retail REITs, Diversified REITs and certain Specialized REITs.
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.
Related: ETF Investors Are Hedging Bets with Long-Term Treasuries
The utility of DRN and the bearish DRV will be on display over the next weeks as a slew of REITs report third-quarter earnings. This week, over 36% of the MSCI US REIT Index reports third-quarter results followed by more than 35% next week, according to Direxion data.
For more information on the real estate investment trusts segment, visit our REITs category.