Retail Resurgence: Right For REIT ETFs?

While the environment remains challenging, the obituary for traditional brick-and-mortar retailers may have been written prematurely. After slumping last year, the S&P Retail Select Industry Index is up about 9 percent year-to-date.

The ability of brick-and-mortar stores to not only survive but thrive is relevant to the real estate sector, a group with significant exposure to retail real estate investment trusts (REITs). The MSCI US REIT Index allocates nearly 16 percent of its weight to retail REITs.

What Happened

Some retailers, including some members of the S&P Retail Select Industry Index, have been performing well following the group's most recently completed earnings season. That index is higher by 12.3 percent over the past 90 days.

Although the Federal Reserve boosted interest rates in June, the MSCI US REIT Index is getting a lift from the retail rebound. The widely followed real estate gauge is higher by 7.6 percent over the past three months.

That is good news for the Direxion Daily MSCI Real Estate Bull 3X Shares DRN, which seeks to deliver triple the daily returns of the MSCI US REIT Index.

Why It's Important

“DRN has gained nearly 19 percent since mid-May. Close to a fifth of the index’s assets are allocated toward retail REITs,” said Direxion in a recent research note.

While the bullish DRN is sporting a second-quarter gain of over 27 percent, its bearish counterpart, the Direxion Daily MSCI Real Estate Bear 3X Shares DRV, is stumbling. The bearish DRV has recently been making a series of record lows. DRV tries to deliver triple the daily inverse returns of the MSCI US REIT Index.

What's Next

“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.” said Direxion. “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.”

The MSCI US REIT Index allocates just over 11 percent of its weight to healthcare REITs. Specialized REITS represent over 18 percent of the benchmark's weight.

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