REITs performed quite well in the first four months of the year, as they were buoyed by strong demand for homes and surging confidence of investors on the sector. However, the sector suffered a huge sell-off in May, plunging close to double digits in that time frame, and severely underperformed the overall market. This decline continued for much of June, especially after the FOMC meeting.
At the FOMC meeting, Bernanke indicated that the imminent tapering of QE3 program later this year would raise interest rates. This situation had a huge impact on REITs, largely because REITs are sensitive to any change in interest rates.
The recent talk from the Fed has certainly influenced Treasury bond yields too. The 10-year U.S. Treasury yields soared to more than 2.5% from the 1.6% mark at the start of May.
With the yields increasing, investors may be turning their focus from REITs and considering going short on the space. This is especially true as the appeal for the high yielding securities are waning on the back of fears over the rising interest rates any time soon.
In fact, the three most popular REIT ETFs – iShares U.S. Real Estate ETF (IYR),Vanguard REIT Index ETF (VNQ) and SPDR Dow Jones REIT ETF (RWR) are still down in the trailing two-month period. This can be compared to a decent gain for the SPY in the same time frame, suggesting that REIT ETFs were easily pushing the market lower.
Further, the rising interest rate environment is a growing concern for REITs as investors are concerned about the negative impact on book values and financing costs (read: 3 Sector ETFs to Profit from Rising Rates).
As a result, investors who are bearish on REITs right now may want to consider a near-term short on the space. Fortunately, ETFs offer several options to investors to accomplish this task. Below, we highlight a few of the options, and some of the key differences between each:
ProShares Short Real Estate ETF (NYSEARCA:REK)
This fund seeks to deliver the inverse (or opposite) return of the daily performance of the Dow Jones U.S. Real Estate Index. The ETF makes a profit when the real estate stocks decline and is suitable for hedging purposes against the fall of these stocks.
The product has amassed over $69.8 million in AUM while volume is light, suggesting additional potential costs in the form of wide bid/ask spread beyond the expense ratio of 0.95%.