12/12/2013 | by
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Mueller on Effects of Leveraged ETFs on REIT Shares
Glenn Mueller, professor with the University of Denver, joined REIT.com for a video interview at REITWorld 2013: NAREIT’s Annual Convention for All Things REIT at the San Francisco Marriott Marquis.

Mueller discussed his research on the effect of exchange-traded funds (ETFs) on the volatility of REIT share prices.

“Exchange-traded funds are not really a unique vehicle anymore,” he said. “They’re really a mutual fund that trades during the day as opposed to at the end of the day.”

Mueller said the rise of leveraged ETFs has impacted REIT share prices significantly.

“We found that as these things grew, and especially as the market got more volatile back in 2007 and 2008, if the market had moved during the day—let’s say 2 percent—by the end of the day, it would be up 4 (percent),” he said. “Each of these ETFs is trying to keep the same portfolio mix as an index, and if a couple of stocks move and others don’t, they have to rebalance every day at the end of the day. Their demand for either selling or buying stocks created a double volatility that shouldn’t have been there. They’re a derivative product, they’re unregulated and they’ve caused havoc in smaller areas of the stock market where the market capitalization isn’t as huge.”

Mueller also discussed the implications of his findings for REIT investors.

“I’ve always said that in the short run, the stock market is emotional, and in the long run, it’s logical,” he said. “If you go back and look at the return on REITs since we started the REIT index back in 1972, the return has been very good if you bought it and put it away. In the long run, they’re solid companies investing in real estate. It’s the best way for individuals to invest in real estate and have good professional management of a big, diversified portfolio of properties. Hopefully, we can do something to regulate these leveraged ETFs to help reduce that volatility.”

Mueller is a member of the faculty at the Franklin L. Burns School of Real Estate and Construction Management and the real estate investment strategist at Dividend Capital Group.