Leveraged Real Estate ETFs Explained for Canadian Investors

As a Canadian investor, you're probably familiar with the idea of investing in real estate, but did you know you can also invest in leveraged real estate ETFs? Leveraged real estate ETFs are a type of investment that allows you to gain exposure to the real estate market with a smaller amount of money.

These funds use debt to amplify the returns of a underlying real estate index, such as the FTSE/NYSE Arca Canadian Real Estate Index. This can be a powerful tool for investors who want to maximize their returns, but it's essential to understand the risks involved.

Leveraged real estate ETFs can be a great option for investors who want to diversify their portfolio and gain exposure to the real estate market. They offer a convenient and cost-effective way to invest in real estate, with many funds trading on major Canadian exchanges.

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Performance Metrics for Leveraged Real Estate ETFs are crucial for investors to understand the fund's performance over time. The BetaPro Equal Weight Canadian REIT -2x Daily Bear ETF had a calendar year performance of 34.55% in 2022.

To put this into perspective, the fund's performance can vary significantly from year to year. In 2023, the fund's performance was -0.42%, showing that even leveraged real estate ETFs can experience downturns.

Here are some key performance metrics to consider:

It's essential to note that the fund's past performance is not a guarantee of future results, and investors should carefully consider the risks and fees associated with the fund before making an investment decision.

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Pricing & Performance is a crucial aspect of any investment, and it's essential to understand the metrics that measure it.

NAV and Market Price information can be found in the Pricing & Performance section, typically as of a specific date. For example, as of 01/27/2025, the NAV and Market Price of DRNNAV were -25.22% and -25.29% respectively for the 1 Month period.

The Expense Ratio is another vital metric that indicates the cost of managing the fund. The Net Expense Ratio of DRNNAV was 1.01% as of 01/27/2025, which is lower than the Gross Expense Ratio of 1.17%. This is due to the Operating Expense Limitation Agreement between the fund's adviser and the fund.

Short-term performance is not a reliable indicator of a fund's future performance, as it can be subject to substantial short-term changes due to market volatility.

Here's a summary of the key metrics mentioned earlier:

These metrics provide valuable insights into the performance of the fund and can help investors make informed decisions.

Leveraged real estate investing involves using borrowed money to amplify returns, often through mortgage financing or partnerships. This strategy can increase potential profits, but also amplifies potential losses.

A common metric to evaluate leveraged real estate investments is the debt service coverage ratio, which measures how well the property's income covers its mortgage payments. This ratio is typically calculated by dividing net operating income by the annual debt service.

The use of leverage can significantly increase the potential return on investment, but it also increases the risk of default if the property's income falls short of mortgage payments. In fact, a study cited in the article found that leveraged properties are more likely to experience financial distress than non-leveraged properties.

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To mitigate this risk, many investors use a debt-to-equity ratio of 80% or less, which allows for some flexibility in case of a downturn in the market. This approach can help maintain a balance between potential returns and risk.

Investors should carefully consider their risk tolerance and financial goals before using leverage in real estate investments.

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The Pricing and Returns section of a leveraged real estate ETF can be a bit overwhelming, but let's break it down.

The Net Asset Value (NAV) of the DRN fund has decreased by 5.26% year-to-date and 5.26% over the past year.

The expense ratio for the DRN fund is 1.17% gross and 1.01% net, which is a relatively low fee compared to other funds.

The DRN fund has been in operation since July 16, 2009, and its expense ratio has been limited to 0.95% through an operating expense limitation agreement.

Here's a comparison of the DRN fund's performance over different time periods:

It's worth noting that the DRV fund has had a more significant decline in performance, with a 10.51% decrease in NAV year-to-date and a 10.57% decrease in Market Close.

Overall, the pricing and returns of a leveraged real estate ETF can be complex and influenced by various factors, so it's essential to carefully review the fund's performance and fees before making an investment decision.

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A leveraged real estate ETF can be a great way to amplify your investment returns, but it's essential to have a solid investment strategy in place.

To achieve this, you can use a dollar-cost averaging approach, where you invest a fixed amount of money at regular intervals, regardless of the market's performance. This can help you smooth out market fluctuations and avoid emotional decisions.

By investing in a leveraged real estate ETF, you can gain exposure to a diversified portfolio of properties, which can provide a steady stream of income and long-term appreciation in value.

Target Level Exposure is a game-changer for investors who want to amplify their returns without taking on excessive risk. HRED allows investors to gain leveraged short exposure to the Canadian REITs sector without the need for a margin account, mitigating the risks associated with margin trading.

This approach offers a more controlled way to leveraged investing, giving you the freedom to make informed decisions without worrying about margin calls. By accessing amplified performance without margin, you can focus on making smart investment choices.

In the Canadian REITs sector, a leveraged short exposure can provide a hedge against potential market downturns, helping to protect your portfolio from significant losses.

An active hedge can be a game-changer for investors with long positions in the Canadian REIT sector. By using HRED, investors can hedge out daily or short-term market risk on their holdings.

HRED provides inverse exposure to Canadian REITs, which means it can help investors mitigate potential losses during market downturns. This helps protect their investment portfolios and preserve capital.

Investors can use HRED to hedge against market volatility, giving them peace of mind and allowing them to focus on long-term growth.

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Leveraged real estate ETFs are designed to provide investors with a way to gain exposure to the real estate market while amplifying their potential returns. They do this by using debt to increase the potential return on investment, but this also means that investors are taking on more risk.

The index used by these ETFs is typically the S&P/Case-Shiller Home Price Index, which is a widely recognized measure of home price appreciation. This index is designed to provide a comprehensive view of the US housing market.

By tracking this index, leveraged real estate ETFs can provide investors with a way to gain exposure to the ups and downs of the real estate market, while also allowing them to amplify their potential returns through the use of debt.

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Horizons Canadian REIT ETFs were launched by Horizons ETFs in 2013, providing investors with a way to gain exposure to the Canadian real estate investment trust (REIT) market.

These ETFs track the performance of a specific index, the FTSE Canada All Cap REIT Index, which represents the Canadian REIT market.

The FTSE Canada All Cap REIT Index is a market-capitalization-weighted index that includes all publicly traded REITs listed on the Toronto Stock Exchange.

The Horizons Canadian REIT ETFs have a low management fee, making them an attractive option for investors looking to add Canadian REITs to their portfolios.

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As you delve into the world of indexes and portfolios, it's essential to understand the sector weightings that make up the overall index. The sector weightings are a crucial aspect of an index, and they can significantly impact your investment decisions.

Telecom Tower REITs hold a significant 14.08% of the total index, making them a substantial component of the overall portfolio.

Data Center REITs, on the other hand, take up 14.00% of the index, closely rivaling Telecom Tower REITs in terms of their weightage.

Retail REITs contribute 13.02% to the index, making them another significant player in the sector weightings.

Health Care REITs account for 12.31% of the total index, while Multi-Family Residential REITs make up 11.26%.

Industrial REITs and Self Storage REITs have a relatively smaller presence in the index, with 9.37% and 7.55% respectively.

Real Estate Services and Other Specialized REITs have a combined weightage of 12.49% (6.59% + 5.90%), making them a notable component of the index.

The remaining sectors, including Timber REITs, Single-Family Residential REITs, Hotel & Resort REITs, and Office REITs, collectively make up 16.08% (1.96% + 1.74% + 1.17% + 1.04%) of the index.

Here's a breakdown of the sector weightings:

Risk management is crucial when investing in leveraged real estate ETFs.

These funds are designed to track a specific real estate index, such as the S&P/Case-Shiller Home Price Index, but they can be highly volatile due to their use of leverage.

A 2x or 3x leveraged ETF, for example, aims to return twice or three times the daily performance of the underlying index.

However, this leverage can also amplify losses, and investors may lose more than their initial investment.

The article notes that in 2020, a 3x leveraged ETF tracking the S&P/Case-Shiller Home Price Index lost over 50% of its value in a single day.

Investors should carefully review the prospectus and understand the risks involved before investing in a leveraged real estate ETF.

The fees associated with these funds can also eat into returns, with some ETFs charging as much as 1.5% in annual fees.

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