How Active & Passive REIT ETFs Differ

July 08, 2016

REITs are a hot investment this year, thanks in part to their strong performance and solid dividend yields. These traits are appealing in an environment where investors are faced with low rates and dropping bond yields everywhere else.

The ETF market has several REIT-focused ETFs that investors can choose from, but so far this year, there are two funds that stand out for different reasons.

The first is an actively managed PowerShares ETF, the PowerShares Active US Real Estate Fund (PSR | C-91). The second is a passive strategy, the Vanguard REIT Fund (VNQ | A-91).

PSR is one of the best-performing actively managed ETFs so far this year, clocking in at No. 11, with gains upward of 10%. Its performance is making it stand apart among other active funds.

VNQ, meanwhile, is earning a different distinction this year—one of popularity. The largest REIT fund in the market today is also one of 2016’s 10 most popular ETFs, seeing net creations of $3.6 billion year-to-date.

You could say that VNQ competes with PSR in a passive versus active battle for the best returns in class. Here’s how their year-to-date performance stacks up: 

Chart courtesy of StockCharts.com

 

If this were a performance showdown, PSR may be among the best active funds of the year, but it’s still lagging the passive VNQ by nearly 3 percentage points.

Trading Spreads Matter

That underperformance might not matter much to investors who prefer PSR’s hands-on active approach to investing in REITs, except for the fact that PSR carries a 0.80% expense ratio, and trades with an average spread of 0.23%. That means investors are shelling out an average of 1.03% to own and trade this fund.

By comparison, VNQ comes with a 0.12% expense ratio and trades with an average spread of 0.01%—that’s about 0.13% in all-in costs, according to FactSet data. It amounts to about $13 per $10,000 invested versus PSR’s $103 per $10,000. That’s a sizable difference.

There are other portfolio differences to take into account. The first one is liquidity—going back to those trading spreads.

PSR has $28 million in assets, and trades on average $75,000 a day with an average spread, as mentioned, of 0.23%.

VNQ has $34.5 billion in total assets, and averages $325 million in daily volume at penny spreads. It’s large and it’s liquid in a way PSR can’t match.

 

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