Selling commercial real estate short: A risky business

— -- Q: In my investment club I suggested we sell commercial and industrial real estate short. Is there an ETF that does that, since I don't want to put the money in just one stock?

A: If you take a stroll down many commercial districts, it's easy to see why you might bet against commercial real estate.

Weak consumer demand and a sluggish economy have been brutal for managers of commercial property. Vacancies are up in many cities as strip malls, office buildings and other property go unrented.

The decline in commercial property has turned real estate investment trusts, or REITs, into a dangerous place for investors. The Vanguard REIT exchange-traded fund vnq is down 5.5% in price this year, even as the Standard & Poor's 500 index has risen 9.5%. And the VNQ ETF is down a crushing 60% from its high in February 2007.

Perhaps you're thinking commercial real estate is going to get even worse. That's probably why you're asking about shorting REITs. Shorting is a bet that a stock will fall. Investors short a stock by borrowing shares, selling them and then buying them back at a lower price. You can read more here about shorting stock.

Probably the easiest way to short commercial real estate would be to short one of the ETFs. There's the Vanguard ETF mentioned above, but that's just one. There are many more, including DJ Wilshire REIT rwr, First Trust S&P REIT fri and iShares' Cohen & Steers Realty Majors icf. You can contact your brokerage firm and inquire which ETF, if any, is available for shorting.

A few words of caution. Remember that REITs pay out a vast majority of their earnings as periodic dividends. Many REIT ETFs are yielding more than 9% annually these days. That means you will be required to cough up those 9% dividends to the party from whom you borrowed the shares while you are shorting the ETF. That's a pretty steep cost when you're speculating.

Also, remember that ETFs are already down quite a bit. A rally off the bottom could be pretty sharp, and if so, you could lose quite a bit of money buying back the shares at a higher price. Be careful.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns. Follow Matt on Twitter at: twitter.com/mattkrantz