When it comes to real estate, location and property type matter, but some ETFs don’t readily focus on those issues. Conversely, Vident Financial’s U.S. Diversified Real Estate ETF (NYSE Arca: PPTY) makes a point of emphasizing characteristics, such as leverage, location and property type.
Due to its indexing methodology, PPTY has a greater tilt toward potential growth segments like residential and industrial real estate, whereas traditional market-cap indices favors the retail segment, which has come under greater stress due to changing consumer habits.
“You wouldn’t buy a house or a commercial property without considering location, property type, and leverage, and you should be wary of a fund that ignores these common sense factors,” said Fred Stoops, Head of Real Estate Investments at Vident Financial, in a recent note.
Stoops adds that approximately 99% of assets in REIT funds, approximately $60 billion, are in cap-weighted approaches, a strategy that ignores these fundamentals.
PPTY’s portfolio is constructed based on the actual properties held by each company in the investment universe. The smart beta index-based ETF screens for four primary factors when investing in real estate, including location, property type, leverage, and governance.
Location can affect the value of a property and is a key driver of real estate performance. Stable targets are used to diversify geographic exposure while favoring dynamic, high-growth locations.
Property type is based on the fact that differences between property types matter, so fixed allocations seek to ensure diversification and balance. A traditional market-cap weighted indexing methodology focuses on retail, followed by communication, whereas PPTY’s more balanced approach takes an overweight position to residential, office space and industrial REITs.
“Real estate isn’t homogenous, so it matters if you are investing, for example, in a retail property or industrial building and if you are investing it in Los Angeles or New York. No sensible real estate investor is location- and property-type agnostic,” said Stoops.
PPTY is up 26.34% year-to-date, beating the largest domestic REIT ETF by 170 basis points. The Vident fund yields 3.14%.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.