There are hundreds of ETFs traded on the ASX and some are bound to overlap each other but not all index funds are the same even if they invest in the same asset class. 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?
How REITs work
REITs are a cost effective means for investors to gain exposure to commercial real estate assets such as office buildings, industrial warehouses / distribution centers / light factories and shopping centers.
REITs are tax efficient because of the income and capital gains are not taxed on the trust level. Therefore REIT distributions are only taxed once when they reach investors.
Within the industry there are REITs which invests across the multiple sectors known as diversified REITS (Stockland) or mostly focus in specific sectors. For example Westfield now known as Scentre only owns shopping centers and Bunnings Property Trust which was spun off from Wesfarmers (owner of Bunnings) mostly own Bunnings stores.
What this means is that the underlying income of the REIT is based on the performance of the real estate assets it owns. By implication, the investors income is dependent on the performance of the REIT it owns in the portfolio which can be considered an implicit asset class choice in the commercial property sector.
As far as we are aware of, there are no residential REITs which is mainly due to the attractive tax treatment of owning investment properties directly (i.e negative gearing) causing such a mis pricing in the sector that it is unattractive for institutional money.
Advantage of REIT ETF vs REIT
Overlay REITs with an ETF structure which tracks the REIT benchmark and you will have a diversified portfolio of REITs.
While the individual REIT dividends can be reduced based on the changes in the underlying portfolio. One of the biggest benefit of investing in a portfolio of REITs is the consistency of the income stream. The ETF provides beta exposure to the sector with overall dividend of the ETF based on the performance of the sector as a whole.
Income distribution is the primary driver of returns in the asset class. Capital gains does make up a large portion of the long term returns but it is hard predict as it is dependent on various factors outside of the investors control like interest rates, rent growth of the assets and cap rates.
Avoid the Losers (Winners)
As an ETF is about market exposure rather than specific stock picking. As we advocate doing detail research on all our investments, an ETF is a short circuit path to this. It is hard enough to beat the index over the long run and if you just want sector exposure, REIT ETFs can be very convenient and cheap means of achieving that goal.
Australia REIT ETF
Right now there are two large REIT ETFs listed on the ASX which provides an opportunity to have a portfolio exposure to the REIT sector.
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.
Index Fund Benchmarks
SPDR S&P/ASX 200 Listed Property Fund (SLF) owns a portfolio of REITs included in the ASX 200 index while Vanguard Australian Property Securities Index ETF (VAP) includes REITs in the ASX 300 index.
Because ASX VAP tracks a broader index (100 more stocks) on a relative basis it has more exposure to the small capitalization REIT. However the analysis further below shows it had limited impact on the return compared to the ASX SLF.
REIT ETF Performance vs Australian Share Market
|ASX REIT ETF||ASX Code||YTD||6 Months||1 Year|
|Vanguard Australian Property Securities Index ETF||VAP||-22.55%||-24.67%||-23.01%|
|SPDR® S&P®/ASX 200 Listed Property Fund||SLF||-21.89%||-24.34%||-24.18%|
The sector has underperformed the broader market as it is again in focus during the crisis. Some of the issues include retail REITs income are hit as result of retail shutdown leading to reduction in ability to pay rent and it is the consensus that the market value of the assets will drop as the economy slows. By implication it looks like REIT distributions has peaked and only cuts going forward.
As result of this investors has exited their positions trying to avoid the worst. This does present an opportunity for long term investors that can live through the distribution cuts but we think there will be a better time down the road.
Difference in Fees
Management 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 there and the upside of an index is that the only goal of the index fund is to track the index which does not require alot of cost to manage. Overall fees for ETFs are lower in index funds compared to actively managed funds.
SPDR S&P/ASX 200 Listed Property Fund charges 0.40% while VAP ASX charges only 0.23% per annum.
The overlap and minor difference in the underlying index both fund track limit the deviation in the returns. State Street SPDR (ASX SLF) holdings show it owns around 20 REITs and Vanguard Australian Property Securities Index ETF has 30 positions.
Top 10 holdings across either fund are the same but at different weightings. This is due to the fact while VAP ETF owns REITs that are also included in the ASX 300 index. The contribution of the smaller market capitalized REIT does not make a material difference.
We covered the list of property trusts on the ASX in detail separately but included some of the highlights below:
The 10 position in the fund make up more than 80% of the portfolio. This is a highly concentrated portfolio where the top 5 positions in the fund make up 50% of the fund.
The largest position in the AREIT sector is not only a real estate investment trust but also one of the largest logistic fund manager in the world.
- Scentre Group (Westfield Australia)
An investor in the REIT will be really taking a large exposure to these 5 stocks.
From a sector exposure perspective all of the major sectors are represented with diversified, industrial, office and retail REITS make up more than 90%.
REIT ETF Returns
12 Month Returns and Distributions History
REITs are known to attract income focused investors and the key benefit of these ETFs is that the distributions are paid quarterly. Therefore it is a highly consistent income stream as long as the underlying investments are performing.
The REIT sector has performed strongly since the financial crisis. Managers actively repaired their balance sheets and have been conservative in managing their portfolio.
Leading into the current crisis the overall gearing levels has been conservative and they learned the lessons of the GFC where they didn’t invest overseas and just focused on Australia. They were also able to raise capital so quick and did so as an extra layer of protection.
While overall REIT ETF yield is low by historical standards, it is still attractive as measured by the spread to cash or fixed income yields.
ASX VAP Dividends / ASX SLF Dividends
|Year||Period||Amount ($)||Franking||Ex||Record||Pay Date|
|April 2020||Q3||$0.66||11%||11||1 Apr, 20||2 Apr, 20||20 Apr, 20|
|January 2020||Q2||$0.87||0%||0||2 Jan, 20||3 Jan, 20||17 Jan, 20|
|October 2019||Q1||$0.51||5%||5||1 Oct, 19||2 Oct, 19||16 Oct, 19|
|July 2019||Q4||$2.53||1%||1||1 Jul, 19||2 Jul, 19||16 Jul, 19|
|April 2019||Q3||$0.54||15%||15||1 Apr, 19||2 Apr, 19||16 Apr, 19|
|January 2019||Q2||$1.37||2%||2||2 Jan, 19||3 Jan, 19||17 Jan, 19|
|October 2018||Q1||$0.33||0%||0||1 Oct, 18||2 Oct, 18||16 Oct, 18|
|July 2018||Q4||$0.53||0%||0||2 Jul, 18||3 Jul, 18||17 Jul, 18|
|June 2018||Special Cash||$4.49||0%||0||5 Jun, 18||6 Jun, 18||14 Jun, 18|
|April 2018||Q3||$1.15||9%||9||3 Apr, 18||4 Apr, 18||18 Apr, 18|
|January 2018||Q2||$0.16||0%||0||2 Jan, 18||3 Jan, 18||17 Jan, 18|
|October 2017||Q1||$0.45||0%||0||2 Oct, 17||3 Oct, 17||17 Oct, 17|
|July 2017||Q4||$0.66||0%||0||3 Jul, 17||4 Jul, 17||18 Jul, 17|
|April 2017||Q3||$0.90||12%||12||3 Apr, 17||4 Apr, 17||20 Apr, 17|
|January 2017||Q2||$1.16||0%||0||3 Jan, 17||4 Jan, 17||18 Jan, 17|
|October 2016||Q1||$0.58||0%||0||4 Oct, 16||5 Oct, 16||19 Oct, 16|
|July 2016||Q4||$1.48||13%||13||1 Jul, 16||4 Jul, 16||18 Jul, 16|
|April 2016||Q3||$0.59||0%||0||1 Apr, 16||4 Apr, 16||18 Apr, 16|
|January 2016||Q2||$1.19||0%||0||4 Jan, 16||6 Jan, 16||19 Jan, 16|
|May 2020||Q3||$0.08||11%||11||30 Mar, 20||31 Mar, 20||29 May, 20|
|February 2020||Q2||$0.14||0%||0||30 Dec, 19||31 Dec, 19||28 Feb, 20|
|November 2019||Q1||$0.08||8%||8||27 Sep, 19||30 Sep, 19||29 Nov, 19|
|August 2019||Q4||$0.59||1%||1||27 Jun, 19||28 Jun, 19||27 Aug, 19|
|May 2019||Q3||$0.07||19%||19||28 Mar, 19||29 Mar, 19||28 May, 19|
|March 2019||Q2||$0.15||0%||0||28 Dec, 18||31 Dec, 18||01 Mar, 19|
|November 2018||Q1||$0.07||9%||9||27 Sep, 18||28 Sep, 18||27 Nov, 18|
|August 2018||Q4||$0.77||0%||0||28 Jun, 18||29 Jun, 18||28 Aug, 18|
|May 2018||Q3||$0.10||0%||0||28 Mar, 18||29 Mar, 18||28 May, 18|
|March 2018||Q2||$0.13||0%||0||28 Dec, 17||29 Dec, 17||01 Mar, 18|
|November 2017||Q1||$0.08||0%||0||28 Sep, 17||29 Sep, 17||28 Nov, 17|
|August 2017||Q4||$0.18||0%||0||29 Jun, 17||30 Jun, 17||29 Aug, 17|
|May 2017||Q3||$0.14||0%||0||30 Mar, 17||31 Mar, 17||30 May, 17|
|March 2017||Q2||$0.13||4%||4||29 Dec, 16||30 Dec, 16||01 Mar, 17|
|November 2016||Q1||$0.07||0%||0||29 Sep, 16||30 Sep, 16||29 Nov, 16|
|August 2016||Q4||$0.15||0%||0||29 Jun, 16||30 Jun, 16||29 Aug, 16|
|May 2016||Q3||$0.10||5%||5||30 Mar, 16||31 Mar, 16||30 May, 16|
The consistency in the dividends in the last 5 years shows it could be ideal for those that are looking for income and can ignore short term price volatility. However it is important to know that investing in the fund is taking on a major exposure to the commercial real estate sector which we consider to be a volatile sector going forward.