ALPS Debuts Active REIT ETF

Today, SS&C ALPS Advisors rolled out an actively managed ETF targeting the REIT space. The ALPS Active REIT ETF (REIT) is only the second actively managed U.S. REIT ETF to be made available to U.S. investors and relies on the Blue Tractor model for semi-transparent ETFs.

REIT comes with an expense ratio of 0.68% and lists on the Nasdaq.

The new fund is subadvised by GSI Capital Advisors, a firm with a long history in managing real estate investments. REIT primarily invests—as its ticker implies—in the securities of U.S. real estate investment trusts, though it can also invest in other real estate-related securities. The ETF’s managers use fundamental and intrinsic value analysis to select securities for the portfolio, seeking out those trading at discounts.

“The strategy is the first retail offering of an institutional separate account strategy that GSI Capital has run for the last 15 years,” said SS&C ALPS Advisors President Laton Spahr.

“It’s a fairly concentrated REIT strategy—they now have a third or more of their portfolio in the top five names. Obviously when you’re running that level of concentration and that level of active share, showing it to the market when you change the position is giving away a lot of intellectual property,” he added, pointing out that was why the issuer felt the different disclosure schedule was necessary.

Overall REIT Space
Out of more than 20 funds focused on the segment, there is only one other actively managed U.S. REIT ETF currently trading. The $94 million Invesco Active U.S. Real Estate ETF (PSR),  which has an expense ratio of 0.35%, discloses its holdings on a daily basis and launched in 2008. However, there are more actively managed real estate ETFs covering international markets.

In total, ETFs covering the U.S. REIT space represent roughly $57 billion in assets under management.

“I’m a fan of having that 5% slice that’s just for REITs,” Spahr said, noting that over the past 25 years, the REIT space has outperformed the S&P 500 Index by an average of 150 basis points per year.

“It fits somewhere in the risk spectrum between investment-grade bonds and S&P 500 stocks,” he added, describing REITs as a “core allocation” rather than a tactical play.

Spahr says that REITs behave like equities, but have a yield component similar to that of bonds. Further, he notes that REITs have a growth aspect that allows their yield to grow faster than inflation.

Shielded Alpha Aspect
REIT is the first ETF to implement Blue Tractor’s Shielded Alpha ETF model. The model publishes a daily basket of portfolio holdings (called its "Dynamic Stock Specific Risk Portfolio," or Dynamic SSR Portfolio) that includes 100% of the security names in the actual portfolio, in at least 90% of their actual weightings.

The remaining 0-10% is decided via an algorithm that randomly generates weightings, while simultaneously reducing tracking error between the Dynamic SSR Portfolio and the actual fund holdings.

The methodology had appeal for REIT, in particular, because it “offers the level of transparency the market wants without giving up the secret sauce,” said Spahr, who appreciates that all of the fund holdings are disclosed rather than providing a mix of actual and “proxy” securities.

For example, if the fund holds a 2% weight in IBM, then one day it might appear in the Dynamic SSR Portfolio as 1.98%, then 2.01% the next, then 1.99% the next. (Guardrails are implemented to ensure the adjusted security weightings don't deviate too far from their actuals.)

Although often lumped in with proxy portfolio solutions, Blue Tractor's Dynamic SSR Portfolio doesn't use substitute stocks. All that's changed are individual security weights.

Also, unlike the proxy portfolio models, the exact details of the overlap between the actual portfolio and the publicly published basket are never disclosed. The aggregate size of the algorithmically generated portion of the portfolio changes day to day and is also never disclosed.

However, just like mutual funds, the actual fund holdings will be published quarterly.

One additional feature: Blue Tractor gives portfolio managers the ability to directly tweak their alternate portfolios via a cloud-based platform.

Contact Heather Bell at [email protected]