The Xchange Blog

What Does Retail’s Rally Mean For REITs?

After months of being underfoot of the broader market bull run, the retail sector has come into its own on the back of successful Q1 earnings results from the likes of Macy’s, Dick’s Sporting Goods, Target and Finish Line, among others. The rally shouldn’t be news to most. The sector has been on fire since the earnings deliveries. Direxion’s Daily Retail Bull 3X Shares ETF (RETL), which tracks some of the larger retail names that have performed so well post-earnings, has climbed steadily in the ensuing weeks.

RETL Recent Performance
Retail ETF Performance
Data Range: 3/15/2018 – 6/15/2018. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. For standardized performance and the most recent month-end performance, click here.

But the retail rally is already well underway, and smart traders are reasonably asking themselves what the surge in retail means for other industries. While there’s an infinite array of possible corollaries to any industry rally, the longstanding albatross around retail’s neck has been real estate. So is the new dawn in retail a second chance for brick and mortar locations, or the start of something new entirely?

The Direxion Daily MSCI Real Estate Bull 3X Shares ETF (DRN), which tracks major REIT companies indexed by the MSCI US REIT Index, has certainly moved in similar kind with retail. DRN has gained nearly 19 percent since mid-May. Close to a fifth of the index’s assets are allocated toward retail REITs like Simon Property Group and Prologis. On the other hand, the Direxion Daily MSCI Real Estate Bear 3X Shares (DRV) is hovering near its all-time low.

DRN Recent Performance
Retail ETFs Performance
Data Range: 3/1/2018 – 5/31/2018. Source: Bloomberg. The performance data quoted represents past performance. For standardized performance and the most recent month-end performance, click here.

While the strength in retail may have aided the outlook on storefronts or inventory storage (as is evidenced by Simon Property’s recent optimistic quarterly outlook revision, other factors will play into either the bull or bear case for REITs. Like every other industry, material costs carry the threat of rising import costs as a symptom of escalating global trade tensions. Canadian lumber tariffs have already dampened growth in the residential real estate market. Other price pressures could also throw water on retail’s overall sustainability through rising consumer costs.

The growth case for REITs, including healthcare or office real estate, hinges on whether demand for new architecture will meet the currently rising costs of land and building materials. So far, price considerations have found parity with the clear growth signals in demand, but traders should look closely at monthly CPI and PPI releases for signs of growing price pressure.

Since borrowing rates are seemingly on the rise worldwide and trade tensions show no signs of cooling, REITs have some hurdles in the midterm. While retail might find safe refuge online, property owners would have to find some extremely creative ways to take advantage of cyber estate.

 

Related Leveraged ETFs:

 


Each leveraged ETF seeks investment results that are 300% of the return of its benchmark index for a single day. Each Fund should not be expected to provide returns which are the return of benchmark’s cumulative return for periods greater than a day. Investing in a Direxion Shares ETF may be more volatile than investing in broadly diversified funds. The use of leverage by a Fund increases the risk to the Fund. The Direxion Shares ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged investment results and intend to actively monitor and manage their investment.
 
RETL Risks – An investment in the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and includes risks associated with the Fund concentrating its investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. The Fund does not attempt to, and should not be expected to, provide returns which are three times the return of its underlying index for periods other than a single day. Risks of the Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Counterparty Risk, Daily Index Correlation/Tracking Risk, Intra-Day Investment Risk, Other Investment Companies (including ETFs) Risk and risks specific to investment in securities in the Retail Industry. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.
 
DRN/DRV Risks – An investment in each Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and includes risks associated with the Funds’ concentrating their investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Each Fund does not attempt to, and should not be expected to, provide returns which are three times the performance of their underlying index for periods other than a single day. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Counterparty Risk, Intra-Day Investment Risk, risks specific to investment in the securities of the Real Estate Sector, for the Direxion Daily MSCI Real Estate Bull 3X Shares, Daily Index Correlation/Tracking Risk and Other Investment Companies (including ETFs) Risk, and for the Direxion Daily MSCI Real Estate Bear 3X Shares, Daily Inverse Index Correlation/Tracking Risk and risks related to Shorting and Cash Transactions. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.
 
MSCI US REIT Index (RMS G) –  The index is a free float-adjusted market capitalization weighted index that is comprised of equity real estate investment trusts (“REITs”) that are included in the MSCI US Investable Market 2500 Index, with the exception of specialty equity REITs that do not generate a majority of their revenue and income from real estate rental and leasing operations. The Index represents approximately 99% of the U.S. REIT universe. One cannot directly invest in an index.
 
S&P Retail Select Industry Index (SPSIRETR) – The index is a modified equal-weighted index that is designed to measure performance of the stocks comprising the S&P Total Market Index that are classified in the Global Industry Classification Standard (GICS) retail sub-industry. One cannot directly invest in an index.