REK - REK: With REITs Looking Awful This Little ETF Is A Hidden Gem

2023-06-21 13:37:33 ET

Summary

• I bought ProShares Short Real Estate ETF in my personal portfolio, to try to profit from a potential near-term decline in public REIT prices.
• REK's -1X exposure to publicly-traded REIT companies moves in the opposite direction of ETFs like XLRE, so I can short REITs without leverage.
• REK as a tactical buy. This is a "rental" ETF rather than a "buy and hold it" ETF.

Are we in a real estate bubble? Who cares? That's not the right question to ask, even though so many are asking it. I prefer to ask this question: are publicly traded REIT indexes vulnerable to a severe price decline? If the answer is yes, I can use ProShares Short Real Estate ETF ( REK ) to gain about as much as the Real Estate Select Sector SPDR ( XLRE ) loses.

REK: A new addition to my personal portfolio

I bought REK in my personal portfolio for the first time on Wednesday morning. The technicals are encouraging, and the fundamental picture backs that up. We all know about the struggles of regional banks. As soon as that crisis became newsworthy earlier this year, the spotlight extended to the type of key customer those banks cater to. That's the real estate industry, where growth is a loan-intensive process, and where sub-segments such as office buildings and shopping centers are increasingly feeling the pressure of a work and lifestyle shift that started with the pandemic. That is likely to leave a lot of real estate firms that were not prepared to see tenants vanish at the rate they are likely to in the coming years.

The nice thing about buying REK now is that the market's fear of a decline in REIT stock prices is the real driver here. As with so many things in investing, it is the concern over palatable ever-more-obvious risks and not the actual realization of those risks that I believe has created a favorable reward-risk trade-off for REK now.

As the chart below shows, REK's -1X exposure to the publicly-traded REIT companies, accomplished through a set of swap contracts with top-tier financial services giants, moves in the opposite direction of ETFs like XLRE. As with all inverse ETFs, even the calmer single-inverse types like REK, holding them for weeks or months instead of a day or so does require some careful monitoring, due to the nature of inverse investing math. For instance, if you lose 20% on an ETF like REK, you need to make 25% to get back to even.

REK is an ETF that frankly is fortunate to still be here. As you can see in the chart below, its assets have not hit $100 million in its 13-year existence, and about a year ago, it was sitting at around $10 million. It is up nicely from there, but is still ignored by investors at a time when REIT stock prices look vulnerable. I prefer inverse ETFs without leverage, and this one fits that criteria, the only one in existence that does when it comes to shorting the REIT sector.

T-Bill rates exceed REIT dividend rates, a bullish sign for REK

There is plenty of fundamental and technical evidence that prompted me to take a modest starting position in REK in my personal portfolio. But there's also this, shown below. Here, using the longer-tenured iShares US Real Estate ETF ( IYR ), we see that for the first time since 2008, the 12-month trailing yield on the 3-month T-Bill ETF, as depicted by SPDR Bloomberg 1-3 Month T-Bill ETF ( BIL ) now exceeds the yield on REITs.

Translation: a big slug of traditional REIT investors, who buy those vehicles for the "equity income," are more likely to skip the equity risk, and get their income from T-Bills and other short-term bond routes. That all adds up to more selling pressure in REITs, and a bullish setup for REK.

Then, there's the recent crash in Operating Earnings Per Share for REITs, charted above. The dip we just saw has occurred two other times in recent memory. During the Global Financial Crisis, and just before the 2020 meltdown. I think there's enough weight of the evidence occurring here to step in and short REITs via REK.

REK: A tactical buy

I rate REK a Buy, though I emphasize that as with so much of today's market, this is a "rental" ETF, not a "buy and hold it" ETF. If my position works out over weeks or a few months or so, that's ideal. But one thing I have learned to get used to in this market environment: apart from a handful of mega-cap stocks, none of which are REITs, most price moves up or down are fleeting. That's why I like having a deep arsenal of unlevered ETFs on my watchlist, exactly for the reasons I am putting REK to use here.

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