Behind The Newest Real Estate ETF

April 24, 2018

Vince BirleyVident is an interesting emerging ETF provider, structured as a trust where trustees make sure profits are used for the benefit only of the ETF shareholders. It’s a corporate setup that in a way reflects Vident’s principles-based approach to investing, and one that’s attracting investor attention, particularly those focused on environmental, social and governance (ESG) criteria. The company has brought to market five ETFs through third-party provider Exchange Traded Concepts, and today oversees about $2 billion in ETF assets. Vident’s CEO Vince Birley offers some insight into Vident’s latest ETF launch, the U.S. Diversified Real Estate ETF (PPTY), and the firm’s overall mission in the ETF space.

ETF.com: Vident’s newest ETF, PPTY, is a smart-beta take on real estate. Why does this approach to real estate investing make sense?

Vince Birley: We looked for the best way to get exposure to real estate rather than just a weighting of real estate securities, like REITs. We asked three things: What kind of real estate do we want to own? Where do we want to own it? What levels of leverage are we looking for? That’s our starting point, and from there we buy REITs at targeted weightings.

It’s kind of reverse-engineered, starting with the underlying different types of properties and where they’re located. The uniqueness here is deciding first what kind of real estate we own, and then buying and weighting the REITs, as opposed to just buying the REITs on a cap-weighted basis, which is almost 98% of the real estate ETFs out there today.

ETF.com: How does PPTY compare with the Real Estate Select Sector SPDR Fund (XLRE), for example, in terms of exposure and return?

Birley: With PPTY, you're going to have a lot less retail; retail's the largest holding in the cap-weighted approach. That's because that's how many more properties are actually publicly listed versus privately listed. We've also doubled up industrial; we’re at 14% versus 7%.

When you talk about return, we didn't build it trying to beat beta, because in the REITs space, beta is whatever is going from public to private, or private to public—it bounces around quite a bit. Like when health care REITs started to come out, all of a sudden health care got a big weighting, because there were suddenly more health care REITs.

We don't target beating the beta. We target getting real estate exposure that’s a combination of good dividend yield and good diversification for inflation hedges as well as growth.

 

PPTY At A Glance

Source: Vident Financial

 

ETF.com: You evaluate a company's use of leverage, and the portfolio has different leverage targets depending on property type. Is this also unique?

Birley: Yes. We looked at what kinds of leverage had impact on returns. At a certain level, leverage starts to put risk onto the REIT itself, and there’s no additive return. So, we establish target levels based on our backtests. It was empirically done as far as what levels of leverage is appropriate.

ETF.com: PPTY already has $18 million in assets gathered in a month. Was this product created with an in-house client in mind? Or did you see a broader void in the market?

Birley: It came to market with a $2.5 million seed by Deutsche Bank. But we talked to various wealth management firms about this ETF. Our primary distribution angle is advisors. You don't know where the money's coming from very easily in the ETF space, but we believe the growth is linked to wealth management firms adopting it.

ETF.com: What’s Vident's approach to ETFs? As a firm, you’re known for principles-based investing, but it’s not clear to me that’s the footprint you’re pursing in the ETF space.

Birley: We are about principles-based investing. That was the thinking behind creating our own indexes. We create them and then sponsor ETFs to track them. The biggest thing we're looking for is giving people clarity into what they own and why they own it. I think the principles help people have a foundation for why investment decisions are getting made the way they are.

Ultimately, we’re trying to create something that delivers long-term investment results, like a good 4%-plus inflation-type return over long periods of time. We think principles are the best way for us to achieve that, so we're trying to build out a suite of principles-based solutions that work together in portfolio construction.

But you're watching us move slowly, because I don't like to build things just in the hope they come. We spend a lot of time researching whether there actually is a need for our solutions, to make sure there are going to be buyers. We want to be known as investment ETFs, not trading ETFs.

ETF.com: To you, is principles-based investing one flavor of ESG investing? Or are the two not to be confused?

Birley: I would say they're all still being defined. ESG is not defined very clearly, but we've been approached by ESG investors. They see us as ESG because of our leadership and governance scores. We have that in all of our products. We’re being considered ESG by a lot of investors.

Contact Cinthia Murphy at [email protected]

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