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If you’re like most Americans, the majority of your household wealth is probably tied to your principle home or other real estate investments. With the recent economic uncertainty and talk of a possible double dip recession, its important to know that you have options to hedge against the risk of further downside in the real estate market.
Before we get started though, please know that these investment instruments come with their own high degree of risk and the opinions given here should not be construed as professional investment advice.
Reverse Sector ETF’s
At the beginning of August as the battle over raising the debt ceiling raged and S&P ultimately downgraded US debt, two Proshares Double Short ETFs broke out:
SKF – Proshares UltraShort Financials (2x short)
SRS – Proshares UltraShort Real Estate (2x short)
Both of these funds strive for a return that is 2x the inverse of their respective Real Estate and Financial ETFs. In other words if financials go down 2% – SKF goes up 4%. It is in effect a double short position on the market. Being a double short position inherently implies double the risk, so if you’re not comfortable managing your own trading account, then these ETFs aren’t for you.
My personal preference as a real estate hedge is the Proshares Ultrashort Financials (SKF). SRS , the Real Estate tracking version of this, is too heavily weighted towards commercial real estate. On the other hand, the financials are moving lower largely due to residential lending woes- whether its write-offs from foreclosures or potential litigation related to underwriting and foreclosure practices. Bank of America – I’m looking at you.
SKF peaked at 1000.28 on March 2, 2009. The closing price as of today is 77.93. Let’s do some math.
Let’s assume your home is worth $300k. Let’s also assume the economy weakens and another round of serious home price declines knocks 25% off of home prices and sets off another round of bank failures. Now your home is only worth $225k and you’re sitting on a $75k hit to your net worth. But what if you put $10k into an ETF like SKF that will soar in such a scenario? If the March 2009 peaks are reached again, that $10k would be worth $128k – not only covering the loss in home value, but leaving you $53k better off than you are today. Granted, this assumes perfect market timing, but you get the point. If you truly believe that we may face another correction, take action now to hedge your real estate investments. With a little proactive action now, you can turn any impending crisis into an opportunity.
In interest of fair disclosure, I don’t own this ETF now, but will be buying at any price under 72.57 and would divest the investment as a failed thesis should it break below the 65 level. Should it hold at or above these levels, I will likely add to the position on any pull backs.