Leveraged Real Estate

Leveraged real estate mutual funds and ETFs seek to achieve a multiple... Leveraged real estate mutual funds and ETFs seek to achieve a multiple of the short-term returns of a real estate equity index. For example, a 2x leveraged long U.S. real estate mutual fund or ETF will aim to return twice the daily return of an index tracking U.S. real estate stocks. It’s important to note that given how often these funds are rebalanced, the effects of compounding mean that they will only achieve their targeted return on a day-to-day basis. For instance, a fund that seeks twice the daily return of U.S. real estate stocks will almost certainly not achieve twice the monthly return of these equities. Over time, leveraged real estate mutual funds and ETFs typically decay given the rebalancing process. As such, they should only be held by experienced traders on a very short-term basis. They are not appropriate for long-term, conservative-minded investors, who should instead look to acquire unleveraged exposure (e.g. through an ETF or mutual fund that buys real estate securities). Leveraged real estate mutual funds and ETFs differ from most equity mutual funds and ETFs because they use derivatives to magnify their exposure to a particular security. These derivatives are typically bilateral (so-called over the counter) agreements with banks that allow the ETF or mutual fund provider to achieve the desired degree of leverage and exposure for their fund. The use of over-the-counter derivatives introduces what is known as counterparty risk: In the event that the bank cannot fulfill its obligations, the mutual fund or ETF in question may be unable to deliver its targeted daily returns to investors. Last Updated: 12/23/2024 View more View less

Leveraged real estate mutual funds and ETFs seek to achieve a multiple of the short-term returns of a real estate equity index. For example, a 2x leveraged long U.S. real estate mutual fund... Leveraged real estate mutual funds and ETFs seek to achieve a multiple of the short-term returns of a real estate equity index. For example, a 2x leveraged long U.S. real estate mutual fund or ETF will aim to return twice the daily return of an index tracking U.S. real estate stocks. It’s important to note that given how often these funds are rebalanced, the effects of compounding mean that they will only achieve their targeted return on a day-to-day basis. For instance, a fund that seeks twice the daily return of U.S. real estate stocks will almost certainly not achieve twice the monthly return of these equities. Over time, leveraged real estate mutual funds and ETFs typically decay given the rebalancing process. As such, they should only be held by experienced traders on a very short-term basis. They are not appropriate for long-term, conservative-minded investors, who should instead look to acquire unleveraged exposure (e.g. through an ETF or mutual fund that buys real estate securities). Leveraged real estate mutual funds and ETFs differ from most equity mutual funds and ETFs because they use derivatives to magnify their exposure to a particular security. These derivatives are typically bilateral (so-called over the counter) agreements with banks that allow the ETF or mutual fund provider to achieve the desired degree of leverage and exposure for their fund. The use of over-the-counter derivatives introduces what is known as counterparty risk: In the event that the bank cannot fulfill its obligations, the mutual fund or ETF in question may be unable to deliver its targeted daily returns to investors. Last Updated: 12/23/2024 View more View less