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.
Summary
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.
Disclosure
The information provided here is for financial professionals only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
All investments involve risk, including possible loss of principal.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Toroso nor any of its affiliates guarantees any rate of return or the return of capital invested. This commentary material is available for informational purposes only and nothing herein constitutes an offer to sell or a solicitation of an offer to buy any security and nothing herein should be construed as such. All investment strategies and investments involve risk of loss, including the possible loss of all amounts invested, and nothing herein should be construed as a guarantee of any specific outcome or profit. While we have gathered the information presented herein from sources that we believe to be reliable, we cannot guarantee the accuracy or completeness of the information presented and the information presented should not be relied upon as such. Any opinions expressed herein are our opinions and are current only as of the date of distribution, and are subject to change without notice. We disclaim any obligation to provide revised opinions in the event of changed circumstances.
