ETF ANALYSIS
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 (in this case, US treasuries). 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 more than one company or instrument in a single transaction. ETFs can be traded through your broker the same way as shares, say, on the EasyEquities platform.
Suitability
Satrix Property fund is an aggressively managed, high-risk portfolio which suits long-term investors with stomach for some capital volatility. You should generally have an investment period of five years or more.
What it does
The Satrix Property ETF tracks the S&P SA Composite Property Capped Index which is a market cap-weighted index containing all companies in the S&P South Africa Composite Index that are classified as property companies.
Attraction
Property ETFs allow investors to enjoy returns from SA’s top listed commercial real estate without the hassles of the actual day-to-day management of the underlying properties. South African listed property has offered an attractive yield and strong capital appreciation over the past few years. The FTSE/JSE Property (SAPY) Index has returned 17.04% a year over the past seven years, which is one of the best-performing indices on the JSE. Another attraction is the potential for high dividend yields.
Drawback
Unlike most ETFs which usually invest in a diversified pool of assets or stocks, the Satrix Property fund invests solely in property stocks. With no diversification, it is vulnerable to downturns in the property market.
Top holdings
Real estate investment trusts (REITs), which own and manage a mix of property types, make up more than half of the index. Retail REITs account for about a third, with real estate operating companies making up 15% and office property REITs 1%.
Risk
Satrix Property ETF is a pure equity fund and hence there may be some capital volatility in the short term. It is also vulnerable to a downturn in the property market.
Fees
The fund has an expected TER of 0.35%, which will make it the cheapest in the segment, just ahead of Stanlib’s fund at 0.37%. All the CoreShares offerings have TERs of above 0.5%.
Historical performance
The fund has no historical record, so the graph is the performance of its benchmark.
Fundamental view
The performance of property stocks is influenced by a variety of factors. Investors look at growth drivers such as rental demand, vacancies, funding costs and the value of each property to determine what the shares are worth. Future acquisitions or developments often drive up prices.
A quick valuation measure to look at when analysing property ETFs is the sector dividend yield – the annual dividend divided by the stock’s share price. Dividend yield can be viewed as the “interest rate” earned on an investment. Listed property is predominantly bought for the dividends and hence investors normally compare its yield with those of other income-generating asset classes such as cash, bonds or shares, but particularly bonds.
Fundamentals for local property companies are largely in good shape, with the poor economic outlook their main threat. If distributions grow roughly in line with inflation and you have a long investment horizon, attractive real returns are achievable even in a rising interest rate environment. Higher interest rates mean higher finance costs and less cash flow available for dividends.
Alternatives
Retail investors seeking exposure to property stocks have four other options: CoreShares PropTrax Ten, CoreShares PropTrax SAPY and CoreShares S&P Global Property all managed by Grindrod Asset Management, and the Stanlib SA Property ETF.
Stanlib SA Property ETF and CoreShares PropTrax SAPY track the JSE SAPY index in a similar fashion. Investors can also get property exposure through the CoreShares PropTrax Ten . This ETF differs from the other two discussed above in that it tracks the FTSE/JSE SAPY Top 10 equal index. It holds the top 10 companies in SAPY in equal weightings of 10% each. While it won’t be as diversified as the other two it certainly caps investments in Growthpoint and Redefine. Also, by investing only in the top 10 property companies, its underlying index is likely to be more liquid. It has a total expense ratio of 0.55%. Another recent listing, CoreShares S&P Global Property ETF, tracks the price and yield performance of the 40 largest stocks (by float-adjusted market capitalisation) of the S&P Global Property Index. Just like Satrix Property, it caps constituents at 10%.
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
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