Real Estate Rebound Bets Pile Up In Leveraged ETF

Historically viewed as sensitive to changes in interest rates and inversely correlated to Treasury yields, the real estate sector and real estate investment trusts (REITs) struggled last year. The MSCI US REIT Index rose just 4.9 percent compared with a 21.7 percent gain by the S&P 500.

Those struggles are carrying over into 2018. With a massive percentage of bond market observers betting that Treasury yields will move higher this year, investors are punishing REITs as a highlighted by a January decline of 4.3 percent for the MSCI US REIT Index.

On the other hand, some risk-tolerant traders are displaying comfort in betting on a near-term rebound for the downtrodden real estate sector. That much is evident by the recent enthusiasm being shown toward the Direxion Daily MSCI Real Estate Bull 3X Shares DRN, which attempts to deliver triple the daily returns of the MSCI US REIT Index.

Luring Traders

DRN's underlying index allocates 19.6 percent of its weight to retail REITs and almost 18 percent to specialized REITs, according to issuer data. Residential REITs and office REITs combine for 29.5 percent of the benchmark's weight. 

Traders have recently been displaying an affinity for DRN. Over the past month, DRN has been averaging $1.57 million in daily inflows, according to Direxion data. 

DRN's bearish counterpart is the Direxion Daily MSCI Real Estate Bear 3X Shares DRV. DRV tries to deliver triple the daily inverse returns of the MSCI US REIT Index.

Tax Impact

“While the market may benefit, but there may be losers to the new tax law,” said Direxion in a recent note. “You might expect a rise from the Direxion Daily MSCI Real Estate Bear 3X Shares ETF, as a decrease in the amount individuals can deduct for interest on home equity loans will generally drive down demand among homebuyers.”

DRV has averaged daily outflows of about $107,000 over the past month.

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