Vident Financial was behind today's launch of a first-of-its-kind ETF tracking the U.S. REIT market, though it can also include other types of real estate companies. The U.S. Diversified Real Estate ETF (PPTY) has a four-pronged approach to REITs, targeting property type, geographic diversification, leverage and governance.
The fund lists on the NYSE Arca and comes with an expense ratio of 0.53%.
PPTY’s underlying index seeks to provide something more customized than the typical cap-weighted exposure to the REIT space, and features significant attention to the issue of diversification. Fred Stoops, Vident’s head of real estate investments, notes that the vast majority of REIT ETFs ignore the factors that typically matter to real estate investors.
“[You can] think of it more as owning properties rather than owning REITs,” said Vident CEO Vince Birley, in reference to the fund’s strategy. “The things you would normally think about at a high level when buying real estate would be where you’re going to buy the real estate—location, location, location—and then what type of property you would actually want to own, and then what kinds of leverage you would want make sure you have, and then certain governance qualities.”
Companies eligible for inclusion in the index must be primarily engaged in the management and ownership of real property, and have at least $750 million in market capitalization while passing liquidity and float screens, according to the prospectus. They must also not be externally managed.
The fund’s index seeks to achieve diversification across property types and geographic exposure, while also affording more exposure to companies with lower levels of leverage. It sets target allocation weights for each of 11 property types, ranging from residential (19%) and health care (7.5%) to data center (7.5%) and student housing (0.5%).
Within the residential, office, industrial, retail and diversified property types, which are the largest groups, the index seeks to achieve geographic diversification. It calculates targets for each of the country’s largest 15 metropolitan areas based on their population and productivity levels, and weights the companies in each property type in such a way as to achieve those exposures, the prospectus says.
“What we’re targeting are cities where you’re having higher growth populations, and those growth populations are having higher GDP per capita in those cities,” Birley noted. The premise behind that, he says, is that human productivity is the source of wealth creation.
The document also notes that the index addresses the issue of leverage. Each property type is assigned an acceptable leverage level, so companies that exceed that level see their weights reduced. Similarly, those that exceed the weighted average for leverage for their property type also see their weights reduced.
Rebalancings and reconstitutions are scheduled to occur semiannually, with individual security weightings capped at 4% during such reviews. Targets for property types and regions are also updated at those times.
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