Tag Archives: management

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.