There are hundreds of ETFs traded on the ASX. There are bound to be overlaps between some funds but not all index funds that invest in the same asset class are created the same. It is important for investors to understand differences between the index funds otherwise how else would you know the true risk and potential return of the investment?
We have provided a detail look through on 2 listed REIT ETFs. REITs are listed Real Estate Investment Trusts which owns direct real estate assets. Examples of the direct real estate assets are typically Commercial Real Estate assets such as Office buildings, Industrial Warehouses and Retail Shopping Centres.
REITs are tax efficient because their income are not taxed on the trust level. Therefore REIT distributions are only tax once when they reach investors at the individual level. There distribution franking credits does is effectively zero.
Within these broad asset classes there are REITs that focus only on particular subset of the Commercial Real Estate market, this include Dexus on Core Office Properties, Westfield on top grade shopping centres or Charter Hall Retail Trust on suburban and neighbourhood shopping centres.
As far as we are aware of, there are no residential REITs. This is due to strong retail investor participation in the Australian residential market partially driven by obsession on residential real estate and as contrary to popular opinion not driven by issues like negative gearing.
REIT ETFs own the equity component of the REITs. Income distribution is the primary driver of returns in this asset class. Unlike other ETFs that focus on particular strategy like Divided High Yield ETF (ASX VHY) while aim to invest in high dividend yield stocks.
The goal of REIT ETF is to create a cheap and diversified Commercial Real Estate exposure.
We have categorised the primary points investors should focus on when looking to invest in a property securities fund and highlighted in each the good, bad and the interesting points.
SPDR S&P/ASX 200 Listed Property Fund (SLF) focus on REITs in the ASX 200 index while Vanguard Australian Property Securities Index ETF (VAP) includes REITs in the ASX 300 index.
On the surface it is only minor difference. However because VAP ASX tracks an index which includes all the REITs in the ASX 300. This means it has a greater bias relatively to SLF on the small capitalisation REITs. However as the analysis highlighted below shows that the impact is not material in the long run.
Those REITs that are not big enough to be included in ASX 200 AREIT index but are included in the ASX 300 AREIT index are therefore also included in Vanguard Australian Property Securities Index ETF.
The variation in the index both fund tracks result in minor impact on the total portfolio. SLF has 19 holdings in the portfolio while Vanguard Australian Property Securities Index ETF has 26 REIT positions.
Top 10 holdings across either fund are predominately the same. This is due to the fact while VAP ETF owns REITs that are also included in the ASX 300 index. The market capitalisation of those REITs are so small, it does not make a material difference.
The 10 position in the fund make up more than 85% of the portfolio. This is a highly concentrated portfolio where Westfield and Scentre, the Operator of Westfield in Australia accounts for 38% of the fund.
The weights of number 3 to 9 is relatively equal. However fund positions after top 10 drops off the cliff. The intra sector size post the GFC shows there are a few large REITs accounting for majority of the sector and number of small REITs with a wide no mans gap in between.
Unsurprisingly, from looking at the real estate sub sector in the AREIT index. Retail is the dominant sector with around 50% of the exposure. Followed by Diversified, Office and Industrial REITs.
Fees can erode a large portion of investment returns over the long run. The advantage of ETFs has over managed funds is that ETFs are passive investment products. Their goal is to track the index rather than pick winners and avoid losers. Fee Structure
Overall fees for ETFs are lower than actively managed products. SPDR S&P/ASX 200 Listed Property Fund charges 0.40% while VAP ASX charges only 0.20% per annum.
Return and Distributions
The REIT sector has performed strongly since the financial crises. Balance sheets has been repaired and management are generally more conservative. The sector has returned 15% per annum for the last 5 years. As a result of both ETF being of the essentially the same portfolio. The overall return profile of both funds are not that much different overtime. The REIT ETFs distributions are paid quarterly.
Chart above shows the rolling last 4 quarter distribution yield for VAP ETF. Current sector is yielding less than 5% verses 7% in 2011. The decline in the distribution yield of the ETF is noticeable given the relatively ‘safe haven’ status of Real Estate. The lower the yield is, the higher the PV of future cashflow. Hence Real Estate asset prices are near cyclical peaks.
While overall REIT ETF yield is low by historical standards, it is still higher than cash or fixed income yields. It is important to note that a large portion of the sector is Westfield and Scentre. Rule of thumb is core retail malls always trade premium to other real estate asset classes hence it artificially lower the overall sector distribution yield.
However if you look closely. As there is a minor difference in the fee structure, overall return for ASX VAP is slightly higher than ASX SLF.