By Dan Weiskopf, ETF Professor

We strive to be cutting edge with our mission in the ETF Think Tank. Our members expect us to think outside the box with our research and collaborate with them on innovative ways to help them grow. In this report we will highlight three ideas or enhancements that we hope our members find constructive:

  • Think Tank Research: The Real Estate ETFs land grab is quite broad, with AUM of $93.7 billion across 48 funds, but bigger is not always better when looking for Alpha. With that in mind, we wish to highlight the Nuveen Short-Term REIT ETF (NURE), the Select SPDR Real Estate fund (XLRE) and the Vanguard REIT ETF (VNQ).
  • We added Darius Dale of 42 Macro to our premium research offering. In October, Darius shared his thoughts during the Think Tank Happy Hour, and turned some heads with his insights. Adding another great mind to sponsor as part of our premium service in the Tank helps our mission to strive for Alpha. Financial Advisors who qualify should reach out to us if they are interested in learning more about Darius’s research.
  • This week, on December 9th, we will be reframing the Think Tank Happy Hour which we started on April 2, 2020. Yes, after 80 weeks, it is time for an upgrade! The guest this week is Mike Halen, the restaurant analyst at Bloomberg.

Who or What is Really “Transitory”: Biden or Inflation?

We try to avoid politics in the ETF Think Tank, but we can’t help but chuckle at the irony of the Fed Chairman telling Congress that “We tend to use [transitory]to mean that it won’t leave a permanent mark in the form of higher inflation ….” I think it’s probably a good time to retire that word and try to explain more clearly what we mean. Not to link the two, but has anyone taken a look at the trend in President Biden’s approval rating as it is correlated to CPI? The trend may signify that someone else might be transitory.image01cMr. Powell…are we really caught in a head scratching situation? Last time I checked, once someone gets a raise they don’t usually like to get paid less. Not sure who should be blamed when Chairman Powell says “We have seen wages moving up significantly, we don’t see them moving up at a troubling rate that would tend to spark higher inflation, but that’s something we’re watching very carefully.” Mr. Powell, what data are you relying on when job growth seems weak and prices are going higher? Are you watching the scarcity of workers or the job growth data that may be flawed? Are more people moving to the Gig economy which, by its nature, skews the data as more people go off the grid? See CNBC reporter’s Steve Liesman’s comment: “After 25 years of reporting I am not believing the top line number by the BLS because of consistent revisions.” (See BLS report for details). This means Liesman believes that job creation is stronger than what is being reported, which also suggests that the unemployment data reported is flawed, which could also mean inflation is understated because more people are getting paid higher wages. Mr. Powell – if the data is flawed, how are you observing the rate of change? Is inflation really at 6.2%, or is it much higher? We expect Mr. Powell, like many of us, will continue to scratch his head in 2022! Stay tuned.

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ETF Think Tank Research: Real Estate NURE, XLRE vs VNQ

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We have received a number of inquiries for real estate ETF ideas. Real estate is believed to be a hard asset that can be used as an offset to inflation. It is noteworthy that at different times, certain stocks have been skewed by their ownership of the huge $44.8 billion Vanguard fund, so active share can make a difference. To that point, the Nuveen Short term REIT ETF (NURE) has a solid “Smart Cost Score” at 29 bps, because of its 21% overlap and reasonable fee at 35 bps. The average fee for REIT ETFs is 46.7 bps, and the Vanguard REIT (VNQ) is at 12 bps. The Smart Cost Calculator measures the active shares of what the ETF provides that an investor pays more for than the broad index. The score of 29 signifies those investors are not paying that much more for a high active share approach.

NURE brings some interesting characteristics to a portfolio strategy beyond just being different. The ETF is focused on Apartment REITS (50%), Hotel REITS (20%) and Self-Storage REITS (20%), which by contracts are structured as short-term leases which would be expected to roll higher with rising rates (See fact sheets for details). The Fund is coming up on its 5-year track record (inception December 16, 2016), which is when we will update the below data. More info can be found on the Nuveen website. One drawback to this Fund is that the dividend is honest. They do not pay out of NAV, so the dividend can be inconsistent.

In addition to NURE, we looked at the SPDR Real Estate Select Sector ETF (XLRE), which has a large cap broad tilt. It is 57% overlapping to VNQ, but coincidentally is only 21% overlapping to NURE (Not sure why 21 is the magic number for NURE?). XLRE sports almost a 3% yield, but more concentration risk because of its 29 holdings. More info can be found on the SPDR Select website. According to Bloomberg, XLRE has seen its YTD flows reach $2.247 billion, which is significant. Flows into VNQ of late have been strong and have led to an all-time high in share count (427.98 million on November 30, 2021). YTD flows for VNQ, again according to Bloomberg, are about $6.091 billion on just the ETF; this excludes outside mutual fund flows in the same space. We would be concerned about some capacity constraints on the Vanguard fund, which has had a history of excess ownership of certain companies. Vanguard already owns between 11.4% and 12.9% of its top 5 real estate holdings: American Tower (AMT), Prologis (PLD), Crown Castle (CCI) Equinox (EQIX) and Publics (PSA). The details about the Vanguard REIT get complicated because, according to Bloomberg, VNQ also owns 59.25% of outstanding shares of its Vanguard Real Estate II fund (VRTPX). While these numbers include the entire Vanguard complex, it does not change the fact that $45 billion for a sector fund is abnormally high.

The bottom line is that structure matters, so we would recommend either combining the two smaller funds or choosing one fund over owning VNQ. Bigger is not always better in the ETF world, and it seems evident that performance from these other two funds has been stronger. An investor who owns these funds is gaining access to the group while also achieving greater diversification. The Vanguard fund may in fact have more holdings, but we are always weary of flows moving price in a narrow group of stocks. Note that Prologis, according to the ETF Think Tank “Ownership Calculator” is 11.8% owned by ETFs vs an average ownership score of 7%. Similar above average ownership exists for the above-mentioned over-weighted positions.

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Happy Hour This Thursday

The special guest in the Get Think Tanked Happy Hour this week is Mike Halen, Bloomberg’s Senior Restaurant Analyst. The restaurant industry provides foundational metrics around inflation, employment and small business growth. It employs about 10% of the overall US work force and at its peak represented about 15 million employees. In the BLS latest report, it was reported that “Employment in leisure and hospitality changed little in November (+23,000), following large gains earlier in the year. Leisure and Hospitality has added 2.4 million jobs thus far in 2021, but employment in the industry is down by 1.3 million, or 7.9 percent, since February 2020.” The ability of the restaurant industry to pass along higher food, real estate and wage costs is critical. Restaurants are ubiquitous, and a great metric to measure the success of economic growth. Thanks for joining us, Mike Halen.

Premium Offering: Darius Dale

We added Darius Dale of 42 Macro to our premium research offering, which we hope to continuously enhance with more smart people. Darius is well known for his model building and research from his days at HedgeEye. We are excited to be collaborating with him. As a free agent, he brings a level of independent thinking through his own set of rules and definitions. We want this kind of thought leadership in the Tank! Darius and 42 Macro can both be found on Twitter: here and here. More information can be found about his investment process here.

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Adding another great mind to sponsor as part of our premium service in the Tank helps our mission to strive for Alpha. Those who qualify should reach out to us if they are interested in learning more about Darius’s research.

Conclusion

The takeaway should be clear: the ETF Think Tank is getting a major upgrade. We are serious about our value proposition, which is to enhance the value proposition of the Members who work with us in the ETF Think Tank. This includes (1) idea generation like having an opinion across 48 REIT ETFs, (2) Offering an open discussion during our Thursday get Think Tank Happy Hour, which this week will focus on the ubiquitous restaurant industry, and (3) sponsoring premium research like Darius Dale of 42 Macro.


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