1st Majority Passively Owned Stock?

October 29, 2018

As the debate rages over the role that passive owners like ETFs play in big equity market moves, Tanger Factory Outlet Centers (SKT) is on pace to become the first stock majority owned by passive investors.

According to data from Bloomberg, Tanger Outlets' passive ownership share now stands at 46.85%, 31.5% of which is owned by ETFs:

 

Top 10 Companies With Highest Passive Ownership
Ticker Fund % Passive Ownership % Owned By ETFs GICS Sector
SKT Tanger Factory Outlet Centers Inc 46.85 31.50 Real Estate
MDP Meredith Corp 40.49 29.56 Communication Services
WPG Washington Prime Group Inc 39.16 23.62 Real Estate
RPT Ramco-Gershenson Properties Trust 38.18 22.64 Real Estate
PEI Pennsylvania Real Estate Investment 37.90 22.57 Real Estate
CBL CBL & Associates Properties Inc 37.65 21.77 Real Estate
ABM ABM Industries Inc 37.54 25.86 Industrials
KRG Kite Realty Group Trust 37.26 21.19 Real Estate
UBA Urstadt Biddle Properties Inc 37.01 21.38 Real Estate
CHSP Chesapeake Lodging Trust 36.84 21.08 Real Estate

Source: Bloomberg Intelligence. Data as of Oct. 25, 2018. Reprinted with permission.

 

"Tanger is the company I think foreshadows what the world might look like in 10, 20 years in terms of passive ownership," said Eric Balchunas, senior ETF analyst for Bloomberg and co-author of the research note announcing the findings.

Dividend ETF Tanger's Biggest Owner

Tanger Outlets is a real estate investment trust (REIT) that invests specifically in outlet shopping malls across the U.S. It owns and operates 42 shopping malls in 26 states.

By market value, Tanger's biggest stakeholder is the SPDR S&P Dividend ETF (SDY), which owns $257 million worth of shares in the company, according to ETF.com data.

SDY is a yield-weighted, high-dividend ETF that holds companies that have increased their annual dividends for at least the past two decades consecutively. Tanger Outlets is the fund's fifth-largest holding, at 1.6%.

At a glance, that proportion might look small. However, this 1.6% holding from an ETF worth $15.5 billion in assets comprises roughly 12% of Tanger's current market capitalization. 

The ‘Zelig’Of Stocks

Predictably, the ETFs with the highest percentage of their portfolio in Tanger Outlets are all real estate ETFs; the fund with the highest percentage stake is the Invesco KBW Premium Yield Equity REIT ETF (KBWY), at 2.8%.

But Tanger shows up in 88 ETFs: value and growth ETFs, small-cap and midcap ETFs, total market funds, dividend ETFs and more, says Balchunas.

"It's the Zelig of stocks," he added, citing a 1983 Woody Allen movie in which the titular character is a man who can blend into any crowd.

High Dividends & ‘Smid-Cap’ Sweet Spot

According to Balchunas, there are two main reasons Tanger is so attractive to passive investors.

The first is its dividend yield of 6.3%, which is high even among REITs, an asset class that tends to pay out higher-than-average dividends. It has also consistently increased its dividend over time, making Tanger a juicy holding for dividend ETFs, such as SDY.  

The second reason is that Tanger, with its market capitalization of $2.1 billion, exists in a sweet spot that potentially lands it in small- and mid-cap ETFs, depending on the particular fund's methodology.

"It just depends on where you draw your line," said Balchunas. "When you're a 'smid-cap' stock, that tends to boost your passive ownership."

Other High Passive Ownership Stocks

So it goes for the other nine stocks with the highest proportion of passive ownership, seven of which are REITs.

"REITs are so juicy that yield-seekers love them," said Balchunas, adding that the real estate is about 25% owned by passive investors, or 10% more than the industry average.

As for the two nonreal estate stocks in the top 10, Meredith Corp (MDP) and ABM Industries (ABM), both offer high dividend yields for their respective sectors of communication services and industrials. They also have a history of reliably increasing dividends over time, which has landed both stocks in SDY alongside Tanger.

Active Still Reigns Supreme

Despite the heavy passive ownership, active investors still drive Tanger's day-to-day price action, says Balchunas. The correlation between Tanger's stock price and SDY's shares outstanding is roughly on par with the correlation of gold bullion to the equity market—which is to say, minimal.

"That's a good sign for those worried about passive investment in Tanger,” he said, “because the stock only seems to move on the buying and selling of active investors."

Instead, passive ownership acts as a tail wind for the price movements of Tanger and other stocks, he argues, amplifying whichever direction active investors are pushing. When active investors bid up the price, then the stock's market cap rises and passive funds must purchase more of it to stay in line with its increased weight in their benchmarks. That, in turn, pushes the price even higher.

Should that stock fall out of favor with active investors, however, the reverse occurs: Passive funds must sell the stock in tandem with its falling market capitalization.

"I think you could get to 80%, 90% passive ownership and still have the stock controlled by active movements," said Balchunas.

Will Tanger Go Over The Edge?

When, if ever, will Tanger cross the 50% passive ownership threshold? It all depends on interest rates, argues Balchunas: "Trump gets the headlines, but rates move the money."

If the yield on the 10-year Treasury rises even higher, he says Tanger's passive ownership could dip down to 40% or farther.

But if the yield on the 10-year Treasury falls below 3%, then, said Balchunas, "I think you could see Tanger breaking new ground."

Contact Lara Crigger at [email protected]

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