“NETL” ETF Takes Advantage of Income Opportunities in Net Leases

Not all real estate investors, new and experienced, want to take on the responsibilities of being a landlord whether it’s residential or commercial property. Fortunately, ETFs give investors exposure to real estate while also deriving the income obtained from real estate investment trusts (REITs) through funds like the Fundamental Income Net Lease Real Estate ETF (NYSEArca: NETL).

Additionally, NETL derives its income from net leases primarily in commercial property. What exactly are net leases?

Per Investopedia, “Net lease refers to a contractual agreement where a lessee pays a portion or all of the taxes, insurance fees and maintenance costs for a property in addition to rent. Net leases are most commonly used with commercial real estate. In the purest form of a net lease, the tenant is expected to pay for all the costs related to a property as if the tenant were the actual owner.”

NETL seeks to track the performance, before fees and expenses, of the Fundamental Income Net Lease Real Estate Index (NETLXT). The index’s goal is to track the performance of the U.S. listed Net Lease real estate sector in a diversified manner by screening for real estate companies that focus on investments in net lease real estate and assigning only those companies identified to the Index. The Index places constraints on constituents to protect against concentration in any one company or tenant.

Net Lease REITs are equity REITs that own properties leased to single tenants under long-term, net lease agreements which specify that, in addition to rent, the tenant is responsible for most, if not all, property expenses. The most common net lease is a “triple-net lease” which requires the tenant pay property taxes, insurance, and maintenance – the three nets in a lease agreement.

Benefits of NETL:

  • Income: REITs’ historical dividend distributions make NETL a source of potential income for your portfolio
    • Tenant pays most expenses which may make cash flows more predictable
    • IRS Tax Code clarification on the deductibility of certain income distributed by REITs may improve after-tax returns.
  • Inflation Hedge
    • Rent escalation provision in leases may help income grow and keep pace with inflation
  • Growth
    • Reinvestment of retained cash flows
    • Potential to raise outside funds at yields lower than those that may be realized through new property investments

Top 10 Holdings:

  1. Realty Income Corp. 8.20%
  2. National Retail Properties 7.92%
  3. VEREIT 7.91%
  4. WP Carey & Co LLC 7.86%
  5. STORE Capital 7.82%
  6. Global Net Lease Inc 4.01%
  7. Stag Industrial Inc. 4.00%
  8. Essential Properties 3.98%
  9. Spirit Realty Capital Inc. 3.94%
  10. Indtl Logi Pt Sh Ben 3.92%

Since its inception earlier this year, NETL has trailing returns of 14% YTD according to Morningstar performance numbers.

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