The commercial real estate sector has delivered lackluster returns for the past few years. That's due to the impact higher interest rates have on commercial real estate. They increase interest expenses, cutting into a property's cash flow. Higher rates also make lower-risk fixed-income investments more attractive. These factors weigh on the value of commercial real estate.
However, the Federal Reserve has started cutting interest rates, and more reductions could be forthcoming. That could drive a rebound in commercial real estate investments. Here's one way to supercharge your ability to cash in on the potential real estate rebound.
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Triple the REIT exposure
Investing in real estate investment trusts (REITs) is one way to cash in on the commercial real estate recovery. These entities own portfolios of commercial real estate. As a result, their stocks tend to be highly rate-sensitive. When interest rates fall, REITs tend to rise.
The Direxion Real Estate Bull 3X (DRN 1.98%) takes this rate sensitivity to the next level. The exchange-traded fund invests in REITs (excluding mortgage REITs) and real estate management and development companies. Its top holdings are some of the largest REITs in the world, including senior housing behemoth Welltower and warehouse giant Prologis.
NYSEMKT: DRN
Key Data Points
The fund uses leverage to invest in REITs (i.e., borrows money to buy additional shares). The fund aims to deliver 300% of the daily return of the index it tracks (the Real Estate Select Sector Index). In other words, if that index rises 1% in a single day, this fund should deliver a 3% return that day. It's important to note that it won't deliver a 3X return over periods longer than a day due to its expense ratio and the impact of down days. However, it can still outperform its index over longer periods if REIT share prices are rising. For example, in the last 90 days, the fund has delivered an over 10% return, which is more than double its benchmark.
High risk, high reward potential
Leverage is a potential returns multiplier. In the case of the Direxion Real Estate Bull 3X ETF, you can earn three times the daily return of the underlying index it follows.
However, leverage works both ways. If the underlying index falls, your investment would fall three times as much. As such, leverage can magnify losses during a downtrend just as much as it can amplify returns during a rally.
Given this, the Direxion Real Estate Bull 3X ETF is for short-term trading, not as an investment. You'd buy this ETF when you're highly confident that REITs will rally due to an expected near-term drop in rates, not to express a longer-term view that rates will steadily decline. You'd also want to sell right after that catalyst passes, even if it didn't have the desired effect. There's a high risk that you could lose money on your trade.
A bold way to bet on a real estate rebound
The Direxion Real Estate Bull 3X ETF enables you to capture 300% of the daily return of commercial real estate like REITs. As such, it offers stock traders a way to make a bold bet on a short-term real estate rally. It's not for everyone, as it's a high-risk, high-reward short-term trading vehicle.
