Screened Global Real Estate?

May 12, 2008

ALPS enters ETF market with a global real estate fund tracking a Cohen & Steers index.


On Friday, a new ETF provider made its debut, when the first fund from ALPS Holdings Inc. - known mainly as a service provider to the investment management industry - rolled out on the American Stock Exchange. The Cohen & Steers Global Realty Majors ETF (Amex: GRI) has an underlying index that covers 75 real estate companies from developed markets in North America, the Asia-Pacific region and Europe.

Components are chosen from a global universe of about 500 real estate securities, including real estate investment trusts (REITs) and REIT-like companies. Capitalization and liquidity screens are applied to eliminate companies smaller than $1 billion and those with light trading volume.

From there, companies are evaluated regarding a number of qualitative and quantitative criteria, including their ownership of real estate, management track record, market position, real estate portfolio quality, corporate governance and capital structure. The index also takes into consideration each country's percentage of global GDP and representation in the global real estate market when selecting stocks for the index. The index is weighted by modified market capitalization. The fund charges an annual expense ratio of 0.55%.

Global real estate has recently gained the spotlight as an alternative asset class that offers the possibility of diversification; REITs and similar structures, in particular, are known for offering the possibility of long-term income due to their regular and frequently sizable distributions. However, GRI is not the first fund of this type to hit the market. Its direct competitor, the First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund (AMEX: FFR) was launched in August 2007. Although FFR charges 0.60% versus GRI's 0.55% expense ratio, its portfolio is more diversified with nearly 300 holdings. The top 10 companies in GRI represent more than 39% of the fund, while the top 10 for FFR are less than 28% of the fund. FFR has not accumulated a significant amount of assets - as of the end of March, it had less than $4.5 million in assets.

GRI will try to distinguish itself with its screening capabilities, selling the expertise of the underlying index provider, Cohen & Steers. Cohen & Steers has a great deal of expertise in the area of real estate investments. It has a team of 37 investment professionals dedicated to researching global real estate securities, according to GRI's fact sheet. And its U.S. index underlies the iShares Cohen & Steers Realty Majors Index Fund (NYSE Arca: ICF).

The real competition to GRI may not come from First Trust but from other fund families that offer U.S. and global ex-U.S. real estate ETFs. Of the big-name ETF providers, both Barclays Global Investors and State Street Global Advisors offer funds that cover those two designations, sometimes at less than 55 basis points - and BGI actually offers several real estate ETFs covering different regions and types of real estate. Using two ETFs or more to cover the global real estate market, an investor can tweak the weightings as they feel appropriate.

For example, SSgA offers the SPDR Dow Jones Wilshire Real Estate ETF (AMEX: RWR) covering the U.S. market and the SPDR Dow Jones Wilshire International Real Estate ETF (AMEX: RWX). The funds charge 0.25% and 0.60%, respectively. Depending how the pair are weighted relative to each other, that could work out to be far less than the 0.55% expense ratio for GRI.

But the idea of "global investing" has become more popular. The first "global" equity ETFs launched last month, and investors are beginning to rethink whether they should really divide U.S. and international exposure, or combine them into one large index.

With cheaper and more flexible options available, investors who choose GRI will likely be attracted to the expertise that is incorporated in the construction of its underlying index. It should be noted that ICF, also based on a Cohen & Steers real estate index, has outperformed IYR significantly during the one-, three- and five-year periods ended March 31, according to BGI's fact sheets. However, with a higher expense ratio than most other real estate ETFs, the small size of its issuing company and its late-to-market status, GRI likely faces an uphill battle. And, of course, there is the question of whether ALPS will be issuing more ETFs.


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