Real estate investment trusts (REITs) and the related exchange traded funds are rebounding. Some of that resurgence is attributable to impressive performances by brick-and-mortar retail stocks, a relevant point because the widely followed MSCI US REIT Index allocates nearly 20% of its weight to retail REITs.
The Direxion Daily Real Estate Bull 3x Shares ETF (NYSEArca: DRN) is an example of a leveraged ETF benefiting from the recent REIT rally. 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.
DRN, “which tracks major REIT companies indexed by the MSCI US REIT Index, has certainly moved in similar kind with retail. DRN has gained nearly 19 percent since mid-May. Close to a fifth of the index’s assets are allocated toward retail REITs like Simon Property Group and Prologis,” according to Direxion research.
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.
Factors To Consider in Real Estate
“While the strength in retail may have aided the outlook on storefronts or inventory storage (as is evidenced by Simon Property’s recent optimistic quarterly outlook revision, other factors will play into either the bull or bear case for REITs,” said Direxion. “Like every other industry, material costs carry the threat of rising import costs as a symptom of escalating global trade tensions. Canadian lumber tariffs have already dampened growth in the residential real estate market. Other price pressures could also throw water on retail’s overall sustainability through rising consumer costs.”
Related: The Case for Active Management in 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.
“The growth case for REITs, including healthcare or office real estate, hinges on whether demand for new architecture will meet the currently rising costs of land and building materials. So far, price considerations have found parity with the clear growth signals in demand, but traders should look closely at monthly CPI and PPI releases for signs of growing price pressure,” according to Direxion.
For more information on real estate investment trusts, visit our REITs category.