Today we’re going to go over how to short commercial real estate with ETFs. Two simpler methods to take a short position on commercial real estate are:
- Purchase inverse ETFs that maintain short positions against commercial REITs
- Purchase put options on ETFs that invest primarily in commercial real estate
Let’s break both of these methods down!
As an initial note – shorting any financial instrument is extremely risky. None of my articles ever constitute financial advice, and please consult with an investment professional before taking any short positions.
What is a Short Position?
A short position is simply taking a financial position whereby you benefit by a certain financial instrument’s price going down. You may here the term that you short the “underlying”. The underlying is simply what you want to go down.
The underlying could be almost anything that has a specifically identifiable price. You can short stocks, bonds, commodities… you name it, someone is probably shorting it!
They can also be thought of like insurance. Say you own a heavily concentrated stock position and you’re worried about the price going down. Instead of just selling it, you could also hold a small short position to minimize your losses.
How To Short Commercial Real Estate With ETFs
Here are two of the (relatively) simple methods to short commercial real estate with ETFs
Purchase Inverse Real Estate ETFs*
Background
The most straightforward and simple way to short commercial real estate is to purchase an inverse real estate ETF.
These ETFs invest solely in financial instruments that short real estate indices, which heavily contain commercial real estate. If commercial real estate suffers a deep pullback, crash, etc., you could profit significantly.
On the other hand, these ETFs have some serious drawbacks.
First, they have higher expense ratios than normal. This keeps more money out of your pockets.
Second, and most importantly, they are not long-term holds. They have extremely high costs to carry short positions for so long. This decays your returns significantly over longer periods of time. It can erode to such a point that, even if you correctly predict a real estate crash, you may not even recoup your investment due to decay.
*NOTE – THESE PRODUCTS ARE EXTREMELY RISKY. THESE ARE NOT MEANT TO BE LONG TERM HOLD INVESTMENTS. THIS IS NOT AN ENDORSEMENT OF THESE PRODUCTS AND THIS IS NOT FINANCIAL ADVICE.
Inverse Real Estate ETFs
With all of that being said, if you still want to try this, two popular options are:
ProShares Short Real Estate (REK) – this ETF achieves a 1x short position on a real estate index. This is less aggressive than other leveraged options, but still provides a short position.
ProShares UltraShort Real Estate (SRS) – this ETF uses leverage to achieve a 2x short position on a real estate index. Because of leverage, it is extremely volatile and can have large upward and downward swings. It also experiences much more decay than REK. This product is better for a shorter term short play.
Purchase Put Options on Real Estate ETFs
The second option involves purchasing put options on regular real estate ETFs.
A put option gives the purchaser the right, but not the obligation, to sell a security at a particular price. You purchase these contracts at a market price, and the market price fluctuates based on, among many things, the price of the underlying ETF.
This is a more complicated approach as it forces the investor to actual purchase put contracts. This is more complicated than just buying an inverse ETF. However, if you’re a bit more savvy of an investor, it can help you fine tune your strategy. You can purchase contracts with shorter or longer durations, at different strike prices, etc.
Bottom Line
You’ve now heard two ways to short commercial real estate with ETFs. You could purchase inverse real estate ETFs like SRS or REK, or purchase put options on real estate ETFs.
Either methods are viable, but they carry extreme risk and a very high likelihood of losing most or all of your investment. Invest wisely and consult a financial professional before proceeding.
DISCLAIMER – THIS ARTICLE IS NOT FINANCIAL ADVICE. THIS ARTICLE DOES NOT CONSTITUTE A BUY, SELL, OR HOLD RECOMMENDATION ON ANY SECURITY MENTIONED HERE. THIS ARTICLE CONSTITUTES MY OPINION AND NOT A STATEMENT OF FACT. ALL INFORMATION REGARDING THE FINANCIAL SECURITIES MENTIONED IS ACCURATE AS OF JANUARY 23, 2024. DO YOUR OWN RESEARCH.