Commercial property is often seen as a great way to diversify your portfolio. You can normally get a pretty stable income and the capital values are less volatile than for equities. And ETFs offer a cheap way to invest in the asset class.
So in this article we’re going to look at four top property ETFs. But before we do that, let’s look at three wider issues for the sector.
Indirect or direct
The most common vehicle for investing in commercial property is the REIT or real estate investment trust. The best-known REITs are big property companies like Land Securities or British Land. These firms tend to make direct investments in property. They will own a building or at least have a stake in the building. Often the REIT will have developed the property in the first place.
You also got smaller investment trusts that are just investment vehicles – they don’t engage in property development. These trusts normally make direct investments into individual properties as well as indirect investments into other property firms.
Property ETFs in Europe can only make indirect investments. Remember, European ETFs operate under the UCITS regulations and UCITS stands for ‘Undertakings for Collective Investment in Transferable Securities.’ Because they’re illiquid, direct property investments aren’t easily transferable, so ETFs in Europe can only make indirect investments.
As we’ll see indirect investments are more liquid than direct ones, but they can also be more volatile. This increase in volatility is at least partly due to the fact that REITs and other property funds tend to take on debt. The greater volatility means that property funds become more correlated with wider stock markets.
Liquidity is a big issue for anyone who wants to invest in property. If you’ve invested in a listed company and you want to get your money out, you can easily sell your shares at the prevailing market price. But with any form of property, it can take months to sell.
This can be a problem for open-ended funds such as unit trusts and OEICs. Open-ended funds normally keep a pot of cash; so if an investor in the fund wants to sell his units, the fund can give him his cash back without any problem. But if lots of investors want to take money out at the same time, then there can be a problem, and managers sometimes have to ‘gate’ the fund which means that investors can’t take their money out for a while. Several funds were gated for a period in summer 2016.
Investment trusts don’t have this problem. They’re closed end funds so if an investor wants to get out, he just sells his shares in the trust to another investor in the market. The existing investor may have to sell at a much reduced price if he’s selling in the middle of some market turbulence, but at least he knows that he can almost certainly sell the shares at any time.
ETFs don’t really have this problem of lack of cash either. Ordinary investors can sell out at any time in the market. The only issue is around ETFs’ unique creation/redemption process. An ETF manager is obliged to transfer some assets to an authorised participant if the AP wants to redeem shares in the ETF. If the ETF’s assets were direct investment, that could be difficult, but given that a property ETF’s assets are indirect property investments, it’s not an issue.
So now we’ve seen that property ETFs should be liquid and tradeable whenever markets are open, let’s look at four top property ETFs:
This ETF tracks the FTSE EPRA/NAREIT UK Index which gives you exposure to all the big UK property firms.
Here are the five biggest constituents in the ETF:
|Constituent||% of ETF|
The ongoing charge is 0.4%.
This ETF tracks property funds in the leading economies of the world. As is normally the case with pretty much any global investment fund, there’s a strong tilt towards US assets in the ETF. Here are the top five countries in the ETF:
|Country||% of ETF|
The ongoing charge is 0.4%.
This ETF includes a range of continental property funds and firms but it excludes UK investments. The fund’s constituents must have a dividend yield of 2% which is a pretty undemanding hurdle. The fund tracks the FTSE EPRA/NAREIT Developed Europe ex UK Dividend+ Index and uses full physical replication. The ongoing charge is 0.4%.
This ETF tracks the MSCI US Liquid Real Estate Index. This index doesn’t just include property equities, it also includes some fixed income assets to offset the debt held by many property companies. Around two thirds of the ETF is held in equities with the remainder in bonds. Whenever, the index is rebalanced the bonds’ weighting is adjusted to take into account the amount of debt held by US property companies.
The largest holding is Simon Property Group which is a large operator of shopping malls. The four biggest holdings after Simon Property are all bonds.
As with all the other ETFs highlighted in this article, the ongoing charge is 0.4%.