XLRE: Quality, Not Quantity In Real Estate

June 09, 2017

The $2.27 billion Real Estate Select Sector SPDR Fund (XLRE) is not unique.

Several other bigger, better-known ETFs cover the U.S. real estate space, such as the $34 billion Vanguard REIT ETF (VNQ) or the $4.5 billion iShares U.S. Real Estate ETF (IYR). These funds have more assets than XLRE. Higher daily volumes. Longer track records. At a glance, it's hard to see how XLRE can compete.

But XLRE has one big point in its favor: an uber-concentrated portfolio. Whereas most real estate ETF portfolios cast a wide net over the sector, including 100 stocks in their portfolios (or more), XLRE holds just 31 names.

That smaller basket is XLRE's biggest selling point, says Jason Ware, chief investment officer of the $1 billion Albion Financial Group, adding that, for him, XLRE hits "the sweet spot" between diversification and high-conviction picks.

"We don't need a fund that has 100 or 150 holdings in it," he says. "We'd rather have a fund of only 30 REITs, as long as they're all REITs we actually want to own."

A Sector Is Born

XLRE is one of 10 Select Sector SPDR ETFs that slice and dice the S&P 500 Index into chunks along certain investment themes, such as energy or financials. In XLRE's case, that's real estate: The Real Estate Select Sector Index tracks a market-cap-weighted basket of real estate investment trusts (REITs).

The Select Sector Indexes follow the Global Industry Classification Standard (GICS), a system jointly developed by S&P and MSCI in 1999 to standardize which companies fall into which thematic buckets.

For 15 years, the GICS lumped real estate with banks and brokerage firms into the financials sector. Back when the GICS first launched, that choice made sense: In 2001, for example, REITs represented just 0.6% of the financials sector, and 0.1% of the S&P 500 as a whole.

But throughout the 2000s, as investment into real estate grew, it began to evolve into its own unique asset class, distinct from financials. Real estate also came to increasingly drive sector performance: By 2014, REITs had swelled to 19% of financials.

"The operating structure of real estate firms is much different than that of the big financial firms," said Matt Bartolini, VP at State Street Global Advisors and head of SPDR Americas Research. That impacts their risk/return profile, he added: "For example, real estate did really well during the interest rate decline, asynchronous to financials."

 

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