ProShares' Financial ETFs vs. Real Estate ETFs - Which Should You Own?

In looking at the constituent holdings of the ProShares Ultra Financials ETF (UYG) I noticed that there seemed to be a good number of REITS included.

To investigate further, I took the holdings of the ProShares Ultra Real Estate ETF (URE) and did a direct compare to the holdings of UYG.

To my surprise, every single one of the holdings in the Ultra Real Estate ETF, comprising a variety of 80 different REITs, was also included in the Ultra Financials.

Relative performance --

It is interesting to see how real estate underperformed the combined financials until March of 2008 when the situation turned around and financials became the one that underperformed.



In the first part of the chart, you can see URE begin to weaken as the news about troubles in the real estate sector began to take a toll. During this time, the idea that the problems in real estate wouldn't spill over into the rest of the financial sector or the general economy was still in vogue. By last October reality began to set in and as URE continued its severe down-trend, UYG began to drop at a faster rate. By March of this year, UYG overtook URE on the down side as bank stocks crumbled. That situation continues today.

For the ultra-short ETFs, SKF and SRS, the charts would, of course, be the inverse.

Conclusion --

To review, the Financial ETF holds a diversified mix of banks, brokers and investment houses, mutual fund management companies, commercial and consumer lenders, insurance companies, etc. as well as REITS.

The Real Estate ETF holds all the same REITs as found in the Financial ETF and nothing else. The REITs do fall into a number of different categories including health care, apartments, retail, hotels, etc.

The primary conclusion is that it may not make sense to simultaneously own both UYG and URE. If you want to invest in diversified financials, you can buy UYG and get the holdings of URE as part of the package.

Similarly, it may not make sense to simultaneously own both of the ProShares Ultra-Short ETFs, the Ultra-Short Financials (SKF) and Ultra-Short Real Estate (SRS). If you want to bet against a diversified basket of financial stocks, buy SKF and get the holdings of SRS as part of that package.

As always there is an exception to the rule. If an investor wishes to overweight the real estate sector beyond what the long or short Financial ETFs offer, then it is reasonable to add some of the Real Estate ETF to the investment mix.

On the other hand, if an investor wants to concentrate solely on REITs, clearly the ultra-long URE or the ultra-short SRS are the appropriate ETFs.

Disclosure: none

Comments

[haydete:]

If you compared, it would have been more complete to include the percentage of REITs in the UYG ETF. (ans: 13.7%)

2008 Jul 12 06:00 PM

[Dr Divergence:]

Useful post. Thank you.

2008 Jul 13 09:52 AM

[Dr Divergence:]

Useful post. Thank you.

2008 Jul 13 09:53 AM

[trade:]

very good..thank you..it is time for "Financials"...we hope!

2008 Jul 13 11:23 AM

[RGR8T:]

Good article. Also, I think the financials must recover to give the market a backbone. However, there are a few more banks that will tank before the financials are really healthy enough to lead the charge.

2008 Jul 14 04:53 PM

[Ames Tiedeman:]

UYG will be up huge when this mess passes.

2008 Jul 16 07:40 AM

[notphaedrus:]

A belated comment, but as of today (8.13), none of the top 25 holdings in URE matches the top 25 in UYG (per Morningstar), so the weighting of the two will be quite different and in may, indeed, make sense to hold both and short both through SRS and SKF, depending on one's views of the two markets. Of more interest than the portfolio overlaps maybe the questions of correlation and amplitudes and whether we are likely to see divergences in coming months.

2008 Aug 13 11:16 AM