This week's featured ETF is 1nvest Global REIT Index Feeder ETF (JSE:ETFGRE). This ETF suits investors who want passive exposure to global listed property over a long-term investment horizon.
To know the investment approach and its portfolio composition, here's the link to the full feature.
Dividend Yield
- 1.3%
Highlights
- Global inflation outlook
- Global Real Estate Investment Trusts (REIT) performance
- The core of diversification
Sector allocation
- Singapore - 3%
- Australia- 4%
- U.K- 4%
- Japan - 4%
- United States - 69%
Our focus this week turns to global listed property where we discuss two benefits from the asset class: protection against inflation and diversification.
But first, a short refresher on listed property. Investors can gain access to this asset class by investing in REITs (real estate investment trusts). Reits are companies that derive income from the ownership, trading and development of income-producing real estate assets. This makes them a useful income option for investors as they have to pay the majority of their taxable income out to shareholders. In SA this is at least 75% but in the US it’s 90%.
What’s happening in the markets?
Global inflation, which proved to be a headache for investors in 2022, is showing signs of abating. As such, Intellidex economists expect local consumer inflation to moderate to 5.7% this year. This is just within the central bank’s target range (3%-6%). Global property firm CBRE expects US inflation to similarly drop to 5%. This is still higher than the US Federal Reserve’s 2% target.
This makes an allocation to global Reits useful as they provide inflation protection during high and moderate inflationary periods, according to data from the US-based National Association of Real Estate Investment Trusts (Nareit). Using the returns of equity REITs and the S&P500 over 1972-2020, the Nareit’s data show that in high inflation periods, strong income returns tend to offset falling REIT prices.
In periods of moderate inflation, Reit dividends more than compensated for the higher price returns on the S&P500, resulting in total returns derived from Reits exceeding the S&P500 by 3.9 percentage points. However, in periods of low inflation, REIT returns fall below the S&P 500 as the income portion does not make up for higher price returns on the S&P500. In particular, we believe 2023 will be a year of moderate inflation with the likelihood that rental income, which is usually adjusted for inflation, may enable Reit performance to keep up with or exceed that of pure equities.
However, there is always the likelihood that pure equities have a very strong year, thus outperforming Reits despite it being a moderate inflation year. On the downside, inflationary pressures may linger for longer than expected (think of load-shedding’s effect in SA), which could lead to higher volatility and underperformance of pure equities.
This highlights the importance of taking the one free lunch in financial markets: diversification. The core of diversification is that the correlation coefficient – which measures the co-movement of returns between assets classes – is low or negative. Lower correlation increases the chances that one asset class holds up or outperforms when another underperforms, which provides some protection for investors during market volatility.
As such, the long-term correlation between SA Reit returns and the returns of pure SA equities and bonds makes for good reading. Data from the SA Reit Association indicate that the correlation between SA Reits and the FTSE/JSE All Share and all bond indices was 0.5 and 0.53. Importantly, this was measured over a 10-year period, which shows the potential benefits over the long term.
Data from the Nareit show a stronger-positive relationship between the performance of pure equities and Reits during December 2015-May 2022. However, the correlation between the Russell 3000 and e-commerce-related Reit returns was just 0.49, which is a plus we explain below.
The 1nvest Global REIT Index Feeder ETF tracks the performance of the FTSE EPRA/NAREIT Global REIT Index. It tracks the performance of the index by investing in the iShares Global REIT ETF, making it a feeder fund. It is, however, reasonably priced, with a total investment cost of 0.34%. Its cost compares well relative to peers. Only the Sygnia Itrix Global Property ETF was cheaper (0.27%) of the four available global REIT ETFs listed on the JSE.
Also, the ETF is mainly invested in the US (69%) and a quick glance reveals that the Prologis (PLD) REIT is the leading stock in the ETF/index, at 7.6%. Prologis owns and manages logistics real estate that facilitates the delivery, storage and distribution of goods. It operates mainly in the US where it derived approximately 86% of its net operating income, according to Q4 2022 financial data. It’s client base includes third-party logistics companies (29%), retailers (23%), wholesalers (21%), manufacturers (15%) and transportation firms (10%).
Amazon.com (AMZN) was a top customer for Prologis in Q4 2022, accounting for 5.3% of net effective rent. This exposure to e-commerce should bode well for Prologis over the short-medium term. CBRE forecasts that e-commerce sales as a percentage of total retail sales in the US will reach a sizeable 26.5% in 2027 from 20% in 2022. Furthermore, the low correlation of e-commerce-related REITs means Prologis is likely to be a contributor to diversification in the ETF.
This, combined with overall diversification across asset classes and potential protection from inflation, makes the 1nvest Global REIT Index Feeder fund potentially useful as part of an ETF portfolio.
Investment term of the week: Correlation
A statistical measure that shows how assets (or their returns) move in relation to each other. It ranges from -1 (strong negative) to +1 (strong positive) with zero indicating no correlation. The closer to -1, the better for portfolio diversification purposes.
1nvest Global REIT Index Feeder ETF (JSE:ETFGRE)
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Background: Exchange-traded funds (ETFs)
Exchange-traded funds (ETFs) are passively managed investment funds that track the performance of a basket of pre-determined assets. They are traded the same way as shares and the main difference is that whereas one share gives exposure to one company, an ETF gives exposure to numerous companies in a single transaction. ETFs can be traded through your broker in the same way as shares, say, on the EasyEquities platform. In addition, they qualify for the tax-free savings account, where both capital and income gains accumulate tax free.
Benefits of ETFs
- Gain instant exposure to various underlying shares or bonds in one transaction
- They diversify risk because a single ETF holds various shares
- They are cost-effective
- They are liquid – it is usually easy to find a buyer or seller and they trade just like shares
- High transparency through daily published index constituents
Disclaimer
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