ETF Trends CEO Tom Lydon discussed the Fundamental Income Net Lease Real Estate ETF (NETL) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
The Net Lease Corporate Real Estate ETF seeks to track the performance before fees and expenses of the Fundamental Income Net Lease Real Estate Index. NETL seeks to provide investors access to sustainable income with predictable growth through investments in Net Lease REITs. Net Lease REITs are a segment of the real estate sector that focus 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.
NETL serves as a yield-generating idea that focuses on the real estate sector leasing corporate properties to single tenants. This helps investors access a total return strategy that targets sustainable income and predictable growth.
So the question becomes – why real estate investment trusts? Real estate investment trusts are a great long-term source of returns for a diversified portfolio. Publicly listed equity REITs exhibited some of the best average annual net return over a two-decade-long period. This means outperforming broad asset categories like U.S. small-cap, U.S. large-cap, and non-U.S. equities, among others.
Additionally, there are improved diversification benefits. 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.
There are also improved risk-adjusted returns. Outside of fixed income, REITs had the highest Sharpe ratio measuring 0.44. This reflects historically high returns and just above average volatility.
So now it’s a question of what even is a “Net Lease” real estate? Net lease 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. The tenant is expected to pay for all the expenses related to property as if the tenant were the owner.
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 theatres. All of these qualify as long-term tenants
Owning properties net leased to single tenants requires minimal management and fewer risks to consider, compared to multi-tenant REITs. Traditional landlords of a REIT with multiple tenants will have to 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 importance of the property 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
The combination of current income with identifiable sources of growth may make NETL appropriate for investors seeking a Total Return Strategy. With an income stream based on contractual lease obligations that must be distributed to shareholders, NETL may be suitable for investors seeking income.
Lastly, NETL may be appropriate for investors seeking targeted exposure to the real estate sector. The top holdings: realty income 8.2%, WP Carey 8.1%, National Retail Properties 8.0%, VEREIT 7.7%, Store Cap Corp 7.1%