1nvest SA Property ETF
Local equities have been under significant strain this year as the FTSE/JSE All Share Index dropped 13.5% year to date (30 September 2022). Also, given the economically sensitive nature of the sector, it comes as no surprise that the JSE SA Listed Property Index dropped 20.0% over the same period.
Using the latter index as a composition of the overall sector, we find that the top three listed property firm/real estate investment trust (Reit) types are diversified (43.4%), real estate (26.8%) and retail (20.7%) Reits. We expect local Reits operating in real estate and retail to face headwinds from higher interest rates, an increasingly strained consumer and a generally poor macroeconomic environment in SA. Specifically, the higher interest rates should lead to lower demand for real estate, especially of a residential type. High inflation, which is reducing consumer disposable income, has led to higher interest rates, which is increasing debt service costs and the cost of new credit.
As a result, we believe portfolio diversification is key for ETF investors who may be increasing portfolio positions due to lower valuations of SA equities. From a portfolio perspective, a Reit ETF such as the 1nvest SA Property ETF may improve total ETF portfolio diversification which is a plus for investors in current market conditions. However, data from the SA Reit Association shows that the correlation coefficient of total returns between the All Share Index and SA Reits was 0.66 (from Sep 2017-Sep 2022). This increased from 0.51 (Sep 2012-Sep 2022) which indicates that Reit and broader market returns are increasingly moving in the same direction, reducing potential diversification benefits.
Consequently, we believe offshore Reit exposure will provide the most diversification. Growthpoint Properties – which is the number one firm in both the index and ETF – generated 38.0% of revenue from offshore operations. It is also a diversified Reit (operationally), which we believe augments its diversification. Its SA portfolio, which accounted for 56.7% net property income, included contributions from retail, industrial, office and health properties. What’s more, a weaker rand, which boosts translated revenue, profits and cash flow (due to stronger foreign currency) can potentially add to investor returns as a result of diversification.
The fund invests in the constituents of the SA Listed Property Index (SAPY) and aims to replicate the index by holding the same weightings of these constituents. The SAPY is an index of the top 20 liquid property companies by market capitalisation that have a primary listing on the JSE. The fund is rebalanced quarterly and therefore has minimal trading costs.
Fund suitability
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This fund suits investors seeking low-cost, passive exposure to SA listed property. Given its high risk, we think this fund suits investors with an investment horizon of five years. Investors should also consider this ETF as part of an overall ETF portfolio to potentially improve diversification and investment returns.
Fees
- The fund has a total expense ratio of 0.29%.
Top holdings
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The top Reit in the ETF (Growthpoint Properties – 18.0% of the ETF/index) generated 38.0% of revenue offshore. From an index perspective, diversified Reits lead the portfolio (43.4%), followed by real estate (26.8%), retail (20.7%), industrial (5.6%), storage (2.3%) and office (1.3%) Reits.
1nvest SA Property ETF (JSE:ETFSAP)
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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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