Housing experts are bracing for impact as whispers of a housing market crash continue to make the rounds on Wall Street. Now, interest in inverse real estate exchange-traded funds (ETFs) is skyrocketing as investors consider the profit potential of a housing market downturn.
Once considered taboo, shorting housing is now an acknowledged strategy. This is in no small part due to Michael Burry; the now-infamous short investor earned billions during the 2008 housing market crash. Burry was one of the first investors to realize and invest in the instability of the industry.
Home prices have climbed even as rising mortgage rates and rampant inflation aggressively eat into the buying power of would-be homeowners. The median sale price of homes in the first quarter of 2022 was $428,700, the highest level ever.
Home prices are clearly ripe for a mild — or not-so-mild — correction. However, inverse real estate ETFs offer investors the chance to hedge against the housing market. These short funds will grow in value if home prices take the dive many analysts predict.
Here are three major inverse real estate ETFs set to explode, should housing make the long-awaited downturn.
| Ticker | ETF | Price |
| DRV | Direxion Daily Real Estate Bear 3X Shares | $45.20 |
| SRS | ProShares UltraShort Real Estate | $15.84 |
| REK | ProShares Short Real Estate | $18.58 |
Direxion Daily Real Estate Bear 3X Shares
The Direxion Daily Real Estate Bear 3X Shares ETF (NYSEARCA:DRV) is easily the most leveraged — and therefore riskiest — fund on this list. DRV tracks three times the inverse of The Real Estate Select Sector Index, or IXRE, which in turn tracks real estate-related companies in the S&P 500. This index is re-balanced every quarter.
Offering a -3X daily leverage means there tends to be a wide gap between the performance of the underlying index (or in this case, inverse underlying index) and the fund itself. Because the fund’s target multiple is reset daily, it requires frequent monitoring and is subject to substantial volatility long-term. DRV is not a product meant for a buy-and-hold portfolio.
The daily reset function of many short funds is somewhat confusing. On a given day, the fund will do as stated. If the index — in this case the IXRE — goes up 1%, DRV will go down 3% per the -3X leverage multiple. However, over several trading sessions, the volatility of the daily reset becomes more clear. If the index goes up 1% one day and down 1% the next, it will have a close to 0% net change. The fund, however, will still be down due to the daily reset. After all, if the fund increases 3% from being down 3%, it will enjoy less profit than if it started at 0% rather than -3%.
This ETF’s leveraged nature also means that, should the IXRE drop more than 33% in a given day, DRV will effectively lose its entire worth. It’s a dangerous game, meant for only the savviest investors. Still, if you believe you can time the fall of the housing market, DRV could yield the strongest returns of any fund on this list.
ProShares UltraShort Real Estate
The ProShares UltraShort Real Estate ETF (NYSEARCA:SRS) offers a -2x daily leverage of the Dow Jones U.S. Real Estate Index.
As with many highly leveraged short funds, timing is key. Like the DRV, the SRS’ leverage is reset daily. That means each day the fund will, on a compounding basis, track the daily movement of the Dow Jones U.S. Real Estate Index. Because of that, the ETF is not a long-hold investment. Rather, investors can rapidly earn 2-to-1 returns on the demise of the housing market, as tracked by the index.
The Dow Jones U.S. Real Estate Index is a float-adjusted market cap-weighted index that tracks the performance of real estate investment trusts (REITs) and other property agencies. It’s three largest holdings include American Tower (NYSE:AMT), ProLogis (NYSE:PLD) and Crown Castle (NYSE:CCI).
With -200% leverage, the ProShares UltraShort fund offers a middle ground between the relatively conservative ProShares Short Real Estate ETF and the ultra-aggressive Direxion 3X Shares. With that said, 2X daily leverage is still risky. That bars the fund from any sort of long-hold strategies.
ProShares Short Real Estate
Last up on this list of inverse real estate ETFs, the ProShares Short Real Estate ETF (NYSEARCA:REK) gives owners a -1x daily leverage of the Dow Jones U.S. Real Estate Index.
This product is functionally similar to ProShares UltraShort ETF, albeit with a more conservative leveraging model.
Unlike some more leveraged funds, the -1X ratio of REK means the ETF will track the inverse of the underlying index a bit more closely. On a year-to-date (YTD) basis, the ETF is down about 17%. With that said, the fund is still meant to be closely monitored on a daily basis.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
