ETF Trends CEO Tom Lydon discusses the NetLease Corporate Real Estate ETF (NETL) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
NETL seeks to track the performance before fees and expenses of the Fundamental Income Net Lease Real Estate Index (NETLXT). NETL seeks to provide investors access to sustainable income with identifiable growth through investments in Net Lease REITs. Net Lease REITs are a segment of the real estate sector that focuses on leasing properties to single tenants under net leases wherein the tenants are responsible for the payment of most, if not all, operating expenses, including property taxes, insurance, and maintenance.
This is a high-yield-generating idea that focuses on the real estate sector leasing corporate properties to single tenants. NETL can help investors access a total return strategy that targets sustainable income and predictable growth.
Why Real Estate Investment Trusts?
Real estate investment trusts are great long-term sources of returns. Publicly listed equity REITs exhibited some of the best average annual net return over a two-decade-long period.
There are improved diversification benefits as well. The sector provided a great source of diversification in a traditional stock and bond mix. REITs showed a -0.03 correlation to U.S. long bonds and a 0.53 correlation to U.S. large caps.
As far as improved risk-adjusted returns outside of fixed income, REITs had the highest Sharpe ratio measuring of 0.44. This reflects historically high returns and just above-average volatility.
Net lease real estate refers to a contractual agreement where the individual leasing the property pays a portion or all of the taxes, insurance fees, and maintenance costs for a property, along with rent. Most commercial real estate follows a net lease model. Basically, the tenant is expected to pay for all the property costs as if the tenant were the owner.
Rent escalation provisions in leases may help income grow and keep pace with inflation. The most common net lease is a “triple-net lease,” which requires the tenant to pay property taxes, insurance, and maintenance – the three nets in a lease agreement.
These properties include convenience stores, drug stores, restaurants, grocery stores, distribution centers, corporate headquarters, health clubs, and movie theaters. These are all long-term tenant-owning properties net leased to single tenants. They require minimal management and fewer risks to consider when compared to multi-tenant REITs.
Traditional landlords of a REIT with multiple tenants will consider operating expenses, property management, rent roll, lease maturities, alternative space, and local supply/demand. A single-tenant net lease will need to consider tenant credit quality, the property’s importance to the tenant, and alternative spaces available. Consequently, minimal landlord responsibilities result in higher margins and more consistent cash flows for single-tenant net leases.
Listen to the full podcast episode on the NETL ETF:
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