As the global economy looks to rebound, the rule about price and location has never been more true in real estate than today. Assets Under Management (AUM) for this ETF investment category are $69.09 billion, or about 1.2% of the $5.686 trillion in aggregate ETF AUM. Arguably, this means the category is relatively small in the ETF mix of assets. Yet, walking home in New York City Saturday night, I was made aware of how foundational the asset class is to so many industries. For example, the recent warm weather in NYC seemed to bring crowds to restaurants again. I expect much of NYC retail real estate will need to be reorganized, but who knows – maybe in a couple of years the vacancy rate will find a baseline to rebound from. Let’s face it – Manhattan retail real estate was on a decline for years already. As a New Yorker, I am also reminded of how important innovation is as a driver of revitalization. I highlight this because I find it amazing that in the ETF market, there are only 3 active ETFs offering real estate access. Perhaps not coincidentally, on February 26th, SS&C Alps, in tandem with the Blue Tractor model and with GSI Capital Advisors as the sub-advisor, recently launched a new active ETF under the symbol REIT. The symbols for the other two active funds are Invesco Active US Real Estate ETF (PSR – $95.8 million AUM) and Fidelity Real Estate Investment ETF (FPRO – $5.2 million in AUM). Active ETFs offering real estate access, including REIT, have only about $113 million in AUM. Heather Bell, of ETF.com, goes deep into the structure of the new REIT ETF in the following link.
Looking at the U.S. and why Active
Thinking through the future, we believe that active should be expected to outperform passive in this category, despite the dominance in passive assets, especially given the disruption from planned changes in taxes, demographics and employment. As investors who enjoy benchmarking trends, we are monitoring the trends in the New York City area closely and note the below New York City Recovery Index as a metrics to measure progress. As a key metric, we also highlight that as the number of Covid-19 vaccines increase to now 2 million a day, the speed of economic recovery will accelerate, driven by subway riders and restaurant reservation factors measured by the New York City Recovery Index.
We also highlight that the Empire State building is owned by a public REIT (ESRT), and is also a metric to monitor the progress of New York’s recovery. Of course, looking beyond the grace and imagery of the Empire State building, we also highlight a $59 billion revenue shortfall for New York through the next two years. To this point, we see the opportunity for investors to embrace active over passive in this category of monumental importance. Real estate is not mobile, but fund flows ultimately should gravitate towards where demographics and economic disruption is best addressed, through a process of targeted analytics that address specific circumstances. We also hope that those portfolio managers offering active strategies will truly provide high active share portfolios. Alpha over cheap access can only be achieved through differentiation.
We are surprised to see how share issuance for Vanguard Real Estate ETF (VNQ) has rebounded at 388 million shares, which is near its peak of 409.43 million on February 27, 2020, and its price is within 10% of its all time high. Are investors not recognizing the rule that location matters? Perhaps more people should take a look at these unloved active funds. Since November 2008, when the Invesco Active US Real Estate ETF (PSR) was launched, it slightly outpaced the Vanguard Real Estate ETF (VNQ). But arguably, this period was much more forgiving than the future outlook is set up to be. Interest rates went one direction since 2008, taxes were reasonable, and peaks and valleys were forgiving for patient creditors. Forecasting the future is challenging, but it would seem that such assumptions can not be reasonably expected in the future. There are about 47 ways to invest in real estate using US ETFs, international and global ETFs. In this report we only focused on US ETFs.
The Vanguard Real Estate ETF (VNQ) makes up about 53% of the AUM, and the passive wrapper overall makes up almost 100% of the category. Given the number of moving parts in this asset category and the number one rule in real estate investing being “location, location, location,” we think active strategies will generate alpha over passive funds in the coming 5 – 10-year cycle for this category. We just hope New York will be one of the winning real estate locations.
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