Advisors and investors are hearing and learning more about environmental, social and governance (ESG) strategies, but many of the selections in this category emphasize the “E” while overlooking the other two parts of the equation.
If there’s any part of the ESG equation that’s often overlooked it’s governance, but the U.S. Diversified Real Estate ETF (NYSE Arca: PPTY) is an example of an ETF that solves that issue.
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.
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 favor the retail segment, which has come under greater stress due to changing consumer habits and temporary closures forced by the coronavirus.
Going With Governance
PPTY is a practical approach to traditional cap-weighted real estate investment trust (REIT) ETFs. PPTY’s underlying index incorporates specific considerations in real estate location exposure to maximize potential growth opportunities. Additionally, emphasizing sound governance principles is at the heart of Vident’s investment approach.
“In REITs and other equity exposures, quality factors including lower debt and solid cash flow growth are helping companies better weather this storm,” said Vince Birley, CEO of Vident Financial. “Those factors are signs of good governance, but they’re not the only ones investors can find. Engaged boards, properly incentivized leaders, and honest accounting are all key things to look for as well.”
Leverage and governance factors are further included to reduce exposure to higher-risk companies. The responsible use of leverage can potentially enhance returns, but taking on too much debt is risky, so the portfolio includes companies with prudent leverage. Additionally, firms with significant governance risks like external management are excluded from the portfolio to diminish further unknowns.
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 crucial driver of real estate performance. Stable targets are used to diversify geographic exposure while favoring dynamic, high-growth locations.
Differences between property types also produce varying results. The fund’s fixed allocations seek to ensure diversification and balance.
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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.
