Real estate stocks and the related exchange traded funds are sensitive to changes in interest and that much is being confirmed this year, but there are ways for risk-tolerant traders to garner short-term profits on both sides of the real estate trade.
The Direxion Daily Real Estate Bull 3x Shares ETF (NYSEArca: DRN) is an example of a bullish leveraged real estate exchange traded fund. 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.
“Now, as we approach the back end of 2018, property-based equity is flagging under the weight of high materials’ costs, and rising interest rates, along with the threat of high housing costs, as well as inflation driving down consumer and business buying power,” according to Direxion research.
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. However, real estate stocks often struggle in November, indicating the bearish DRV could be a trade to consider this month.
Interest Rate Issues
“Despite the overall stronger year REITs have had when compared to homebuilders, they’ve also felt the shock of recent headlines. Things like the September rate hike’s potential effect on property investments and increased borrowing rates as well as fluctuations in retail performance impacting retail REITs have put some downward pressure throughout the industry,” according to Direxion.
The Federal Reserve has boosted rates three times this year and a fourth rate hike is widely expected in December, but some real estate ETFs have been surprisingly solid in recent weeks.
“While the near-term potential for REITs remains better than the street might suspect, obstacles from a tightening economic picture could spell trouble for real estate holdings,” said Direxion. “For one, rising oil prices and already high premiums on goods being taxed at the border could prove more of a drag on overhead spending for companies who might otherwise looking to expand. These might also take a hit from the tightening economic picture both here and around the world, if projections for GDP begin to falter.”
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