Tag Archives: xlre

Commercial Real Estate May Help Provide A Smoother Ride On The Road To Your Investment Goals

By Jennifer Perkins, Portfolio Manager, Principal Real Estate Investors Much hasn’t changed since the start of the year! Financial markets have recovered somewhat, but are still volatile due to geopolitical concerns, and declining oil and commodity prices have also impacted stock prices and economic growth. Meanwhile, the chase for yield in a low interest environment still continues in fixed-income markets. With an eye on the road ahead, investors are hoping for a smoother and less stressful ride to meet their investment goals. The vehicle that could get them there is commercial real estate! This is the second in a series of four blog posts highlighting some compelling reasons why we believe many investors should include private – also referred to as direct-owned – commercial real estate in their investment portfolios. While these reasons are not new, market volatility, changing market dynamics, and the potential of lower long-term return expectations raise an opportunity to reiterate the case for considering the asset class for inclusion into your portfolio. Compelling reasons to include private commercial real estate: Adds portfolio diversification. May aid in dampening volatility, potentially increasing portfolio total risk-adjusted return. A source of potential income. A possible defense against unexpected inflation. Just to recap, my last blog post discussed why private commercial real estate hasn’t historically conformed to similar whipsaw behavior the equity market was experiencing at the start of 2016, potentially allowing for private commercial real estate to add true diversification to an investment portfolio. This blog post expands upon Reason 2: Private commercial real estate may aid in dampening volatility and increases the potential for improving total portfolio returns adjusted for risk. As an investor in private commercial real estate, you are buying units of ownership of office buildings, industrial buildings, apartment buildings, retail centers, and even hotels. The buildings comprising a larger portfolio are acquired through private transactions between a willing buyer and seller, specific to individual properties. Investing in tangible properties influenced by space market fundamentals (meaning tenant demand and available supply) versus investor sentiment likely helps to dampen volatility. Unlike Real Estate Investment Trusts (REITs), private commercial real estate is not influenced by fractional ownership trading, which occurs in public markets on a public exchange. Values of private commercial real estate are also supported by in-place contractual leases, typically having meaningful duration, that help drive a steady and fairly predictable stream of income for investors of core, occupied commercial real estate. Investor return requirements on this current income, as well as total holding period returns, are driven by spreads over risk-free rates (Treasurys). Such tenant demand, available supply, contractual lease terms, and investor return requirements don’t dramatically change each and every day, thereby helping to create the potential for a return pattern with lower volatility or variability over an investment period. Over the past 10 years, the ride or return pattern experienced when investing in stocks, bonds, and private commercial real estate has been notably different (see Exhibit A). The return pattern for commercial real estate has been far smoother compared to stocks and bonds. By including an allocation to commercial real estate in an investment portfolio, the ride over the investment period could be smoother, with less turbulence. Click to enlarge Indexed to 100 as of 31st March, 2016; Source: 500 Data (Bloomberg), Investment Grade Corps (Barclays), CRE Private Equity (NFI-ODCE EW); It is not possible to invest directly in an index. Past performance does not guarantee future results. A smoother expected ride also creates the potential for increased total portfolio returns when adjusted for risk. Private commercial real estate could offer a strong income (current) return (historically 70-80% of total return) as well as the potential for appreciation (or depreciation). Exhibit B shows the effects of increased exposure to private commercial real estate has produced a slight increase to total portfolio returns, but most notably, lowered the risk, or volatility, of those returns over the 10-year time period. Therefore, the inclusion of private commercial real estate within an investment portfolio has the potential to increase total portfolio return per unit of risk. Click to enlarge Click to enlarge Click to enlarge Source: S&P 500 Data (Bloomberg), Investment Grade Corps (Barclays), CRE Private Equity (NFI-ODCE EW) In my next blog post, I will discuss Reason 3: Private Commercial Real Estate is a potential source of durable income ; another compelling reason to consider including commercial real estate as part of an investment portfolio. Stay tuned and enjoy the ride! — 1 Percentage of risk shown is the annualized standard deviation of index returns and is a measure of return volatility. 2 Annualized holding period total returns divided by standard deviation of returns over equivalent period. It is not possible to invest directly in an index. Past index performance is not indicative of future return.

A New Sector ETF Defends Against Rising Rates On The Cheap

10-year Treasury yields have begun pricing in that view by soaring nearly 8.5 percent over the past month. With rising rates right around the corner (maybe), investors might want to have a look at a new financial services ETF, XLFS. Another way of looking at XLFS is that the new ETF is XLF without real estate stocks, an important feature. By Todd Shriber, ETF Professor As investors have come to grips with the fact that it is highly likely that the Federal Reserve will finally raise interest rates next month, 10-year Treasury yields have begun pricing in that view by soaring nearly 8.5 percent over the past month. Although financial services stocks, on a historical basis, have questionable reactions to increases in borrowing costs, conventional wisdom holds that the sector is positively correlated to higher interest rates. The corresponding exchange traded funds are reflecting that thesis as the Financial Select Sector SPDR ETF (NYSEARCA: XLF ), the largest financial services ETF, is higher by 2.1 percent over the past month. With rising rates right around the corner (maybe), investors might want to have a look at a new financial services ETF, the Financial Services Select Sector SPDR ETF (NYSEARCA: XLFS ) . The Financial Services Select Sector SPDR, which debuted last month, was brought to market ahead of real estate becoming the 11th Global Industry Classification Standard (GICS) sector. That change is scheduled to occur after markets close on August 31, 2016. In November 2014, S&P Dow Jones Indices and MSCI, two of the largest providers of indices for use with ETFs, announced real estate – previously included as part of the financial services group – would become its own sector . Another way of looking at XLFS is that the new ETF is XLF without real estate stocks, an important feature when considering real estate equities are vulnerable to rising interest rates and currently richly valued relative to the broader market. According to AltaVista Research data, the Real Estate Select Sector SPDR ETF (NYSEARCA: XLRE ) , which debuted with XLFS, has an estimated 2015 price-to-earnings ratio of 36.4 compared to 17.8 for the S&P 500. Underscoring how much of a difference real estate exposure makes in terms of valuation, the P/Es for XLFS and XLF are 12.9 and 14.4, respectively. Remember, XLFS does not hold real estate stocks, but XLF does. “Financial Services firms have made steady improvements in profitability (margins and ROE) since the Financial Crisis, and with lower leverage hopefully they will be more stable as well. Given the robust, double-digit long-term EPS growth projections and reasonable valuation multiples, the sector looks attractive at these levels,” said AltaVista. The research firm rates XLFS neutral. Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK.B ) and Wells Fargo & Co. (NYSE: WFC ) combine for over 20 percent of XLFS’s weight. Other top 10 holdings include Bank of America Corp. (NYSE: BAC ) and Citigroup Inc. (NYSE: C ). Disclaimer: Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.