Tag Archives: investing

The FlexShares Global Quality Real Estate ETF Is As Much Domestic As Global

Summary GQRE has a fairly high expense ratio for half of the holdings being domestic equity. I don’t see a benefit to using one global REIT ETF when investors can combine a lower expense ratio domestic fund with an international REIT ETF. The ETF has more concentration to individual company weights than I would want to see. Investors should be seeking to improve their risk-adjusted returns. I’m a big fan of using ETFs to achieve the risk-adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. One of the funds I am researching is the FlexShares Global Quality Real Estate Index ETF (NYSEARCA: GQRE ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. Expense Ratio GQRE sports an expense ratio of .45%. In any event, that falls short of being “excellent”. When we consider that around half of the positions are domestic equity, it looks even less appealing. I would favor getting a pure domestic equity REIT ETF for any diversified domestic exposure that is desired. There are several options with dramatically lower expense ratios for the domestic equity position. International equity REITs are a very small niche, and the sector generally has higher expense ratios, but there is no need to pay it on the domestic assets. Country Allocations I grabbed the following chart from the FlexShares website: If we look past the enormous domestic allocation, the next major weights are Hong Kong, Japan, United Kingdom and Japan. Those four are usually the top 4 countries for international REIT ETFs. I’ve looked at enough of them to simply know that off the top of my head. The interesting thing here is that they weighted Hong Kong at the top and Japan in the second place. Most international REIT ETFs, in my experience, are prone to overweighting Japan. If the fund were designed to have a heavier weight on the other countries that are traditionally underweighted, it would provide a nice bright spot in the portfolio. Holdings I grabbed the following chart to represent the top 10 holdings. (click to enlarge) Unlike most international REIT ETFs, the top holdings here should be recognizable to many investors. The top 10 holdings include 6 that are from the United States and fall under “large cap”. There is a benefit to large-cap REITs, because larger-capitalization companies tend to have more coverage, which results in more efficient pricing, and thus, a lower level of volatility. A Bright Spot in the Holdings While I’d like to see lower weights for individual holdings, I can still appreciate the sector exposure. The top holding is Public Storage (NYSE: PSA ). If you don’t remember them off the top of your head, I bet you will when you look at the photo below. I retrieved it from a piece by Michael Hooper on PSA : If you want some diversification in your exposures, then PSA makes great sense, since it operates in the storage sector of the REIT market. I have no problem with this being a major holding for any domestic equity REIT, and it frequently is one of the top holdings in domestic REIT ETFs. Moving down the list, we see that Simon Property Group (NYSE: SPG ) is another major holding. The downside here is that SPG is literally the #1 holding of most domestic equity REIT ETFs. If you are holding domestic equity REIT ETFs, you already have SPG in your portfolio. Seriously, check the holdings for your ETF and you’ll probably see SPG near the top. I have nothing against investors holding SPG. I hold domestic equity REIT ETFs, and the top position is Simon Property Group. However, my domestic REIT ETFs have expense ratios of .07% and .12%. As a sector, commercial REITs are being given a very heavy weighting. Because the fund is holding so many commercial REITs, I’m glad to see a storage REIT and two residential REITs near the top. However, I do wonder why they aren’t including established champions like Realty Income Corp. (NYSE: O ) if the goal is to establish a portfolio of REITs that are efficiently operating large operations. If the focus is on the “quality” of the underlying holdings, it is hard to argue against a triple net lease REIT with over 80 dividend raises to-date and a focus on only renting to customers with high credit quality and business that are likely to survive any moderate depressions. They do have National Retail Properties (NYSE: NNN ), which is a triple net lease REIT that I find very attractive. I like it enough that I bought shares of NNN for my portfolio to complement my position in REIT ETFs. Unfortunately, the position is only about 1% of the total portfolio. Liquidity The liquidity is bad. If investors want to take a position, only use limit orders to trade the ETF. Conclusion The fund offers heavy weightings to domestic equity that could be more efficiently purchased through domestic equity REIT funds. The fund appears to have a large bias towards buying large-cap REITs and their exclusion of one very high-quality net lease REIT leaves questions about how “quality” is the factor influencing selections. To be thorough, I downloaded the entire list of holdings to ensure that O was not simply positioned outside of the top 10. I didn’t see it anywhere in the fund. Overall, I’m not impressed with the fund. It could be an interesting play if the shares were deviating from NAV, but that would really put the investor in the place of trying to play as a market maker rather than an investor. If the expense ratio was low enough, I could see investors using this as a way to get global REIT exposure. In that case, I would want the domestic allocations to be even higher. Since international REITs move with international stocks, I don’t see the point of combining international REITs with domestic REITs. Yes, they are both REITs. That does not mean they need to be in the same fund.

Comparing 3 Small Capitalization ETFs Tracking The Russell 2000 Indexes

Summary The highest dividend yield comes from IWN, but the lowest expense ratio comes from IWM. The sector allocations for IWN and IWO add up to the same allocations as IWM. Between IWN and IWO, I don’t see IWO as being substantially more aggressive despite being based on a growth index. There is a rare situation where an investor could benefit from combining the value and growth funds rather than using the main fund. One of the areas I frequently cover is ETFs. I’ve been a large proponent of investors holding the core of their portfolio in high quality ETFs with very low expense ratios. The same argument can be made for passive mutual funds with very low expense ratios, though there are fewer of those. In this argument I’m doing a quick comparison of several of the ETFs I have covered. Ticker Name Index IWM iShares Russell 2000 ETF Russell 2000 Index IWN iShares Russell 2000 Value ETF Russell 2000 Value Index IWO iShares Russell 2000 Growth ETF Russell 2000 Growth Index By covering a few of these ETFs in the same article I hope to provide some clarity on the relative attractiveness of the ETFs. One reason investors may struggle to reconcile positions is that investments must be compared on a relative basis and the market is constantly changing which will increase and decrease the relative attractiveness. Dividend Yields I charted the dividend yields from Yahoo Finance for each portfolio. All else equal, I consider higher dividend yields to be more favorable even if the expectation for total returns is the same. The preference for higher yielding ETFs comes from behavioral finance rather than modern portfolio theory. Under behavioral finance the human elements of investing are considered. A higher yield can encourage investors to stay invested when the market is done and to recognize lower prices as an opportunity to acquire shares that are “on sale” rather than a reason to panic and sell their portfolio at low prices only to repurchase the securities at higher prices. Expense Ratios I want diversification, I want stability, and I don’t want to pay for them. My general guideline for expense ratios is that I want to see the ratios below .15% on domestic equity ETFs and below .30% on international equity ETFs. However, there are times where it is reasonable to make an exception. Funds that must regularly rebalance their portfolio have a better case for having a high expense ratio than funds that simply follow a market capitalization approach. Sector I built a fairly nice table for comparing the sector allocations across each ETF to make it substantially easier to get a quick feel for the risk factors: (click to enlarge) For an investor with an emphasis on certain sectors there could be an incentive to take either the growth or value side. I find the health care sector to be a fairly defensive allocation, but it is heavily over weight in the growth fund and underweighted in the value fund. The other major defensive allocations are consumer defensive, which is similarly weighted, utilities, which is heavier in value, and real estate which is heavier in value. All things considered, I don’t find the growth ETF to be substantially more aggressive than the value ETF despite the growth ETF being characterized by funds with higher expected earnings growth rates and higher price to book ratios. Would You Ever Want to Combine IWO and IWN? IWM represents the entire Russell 2000 index and the weightings for IWM are consistently within a very small rounding error of the weightings for the other two funds because of the way the value and growth indexes are constructed. Because of the way the funds are constructed, I would expect IWM to consistently outperform a position of IWN and IWO since the investor would save on the expense ratios by paying .20% on their position rather than paying .25% on each of the other funds. On the other hand, theoretically if the funds were trading at a small discount or premium to NAV there could be a reason to take the two smaller funds. Returns I thought it would be interesting to run the returns on all 3 ETFs and see how similar or different the performance was across the ETFs. The results surprised me. Over the last 15 years or so the value side of the index performed dramatically better. Given the dot com crash early in the century, the results may be heavily biased. (click to enlarge) I entered the ETFs with the growth ETF first, the blended ETF second, and the value ETF third. It is interesting to note that the beta and annualized volatility moves down as we shift from growth towards value. That fits what I would expect, but it is interesting to see that the lower risk position (using beta) materially outperformed. However, when we restrict the performance to the last five years, the picture for returns changes: (click to enlarge) Despite the growth ETF offering superior returns over the last 5 years, it has still demonstrated a higher beta and higher volatility. Therefore, I would expect the higher level of volatility and beta on IWO to remain as a simple function of investing in small capitalization growth companies. Conclusion Over the last 15 years there was a strong outperformance by the value side of the index. Despite the strong performance of the value side through a period that saw two market crashes, the value side of the index does not look dramatically safer. The beta values indicate that the risk level on the growth side of the index is around 8% to 10% higher than the value side. In my opinion, the most attractive option for long term investments would be IWM for the lower expense ratio of IWN for the lower beta since I hold a substantial position in larger capitalization domestic equity.