Ron and Dave dissect some of today’s most important REIT ETFs.
I am feeling lazy, as always, and didn’t want to write about the new REIT ETF but I received so many messages that I decided, maybe, I should say something.
I didn’t want to blog about the ETF because it is easy enough to understand. It will hold a basket of REITs, 23 to be exact, from countries such as Singapore, Hong Kong and Australia. It will distribute income quarterly and the distribution yield is estimated to be 5 percent at IPO.
The ETF is probably a good choice for people who want to have exposure to REITs but are too lazy to be bothered with researching individual REITs. OK, I understand the lazy bit but they will have to take the good with the bad in the ETF.
For people who know more about REITs, they are probably better off investing in individual REITs. I don’t know about you but a 5-percent distribution yield from a REIT product is unattractive to me.
Well, remember that REITs are leveraged instruments. Leverage magnifies gains. So, the 5-percent yield is after magnification. Taking into consideration that they distribute 90 percent to 100 percent of their cash flow (i.e. they have zero retained earnings), a 5-percent yield doesn’t seem attractive.
To me, the only good thing about the ETF is that having a portfolio of 23 REITs reduces concentration risk.
However, if diversification is what we want, we can try to form our own REIT ETF.
Taking from my portfolio, for example, we could put together an “AK REIT ETF”:
1. AIMS AMP Cap. Ind. REIT
2. FIRST REIT
3. Frasers Log and Ind. Trust
5. IREIT Global
6. Croesus Retail Trust
OK, I am being a bit liberal here since not all are REITs but you get the idea.
Assuming equal weight given to the seven components in “AK REIT ETF”, we are looking at a distribution yield of more than 7 percent.
“AK REIT ETF” would generate at least 40 percent more in income than “NikkoAM-Straits Trading ex-Japan REIT ETF”.
Oh, did you notice that my REIT is also less of a mouthful? Yes, I know. Bad AK! Bad AK!
Of course, we would also have control of what we want in and what we want out. We could also change the weight of each component.
If we are investing in REITs for income, if we want some diversification, then, perhaps, NikkoAM-StraitsTrading ex-Japan REIT ETF is a decent option.
Otherwise, the ETF really doesn’t seem attractive to me at all.