First 'Active' Real Estate ETF Begins Trading

November 20, 2008

Invesco PowerShares Capital Management's Active U.S. Real Estate Fund (NYSE Arca: PSR) began trading this morning, offering the first "active" competition to the major REIT exchange-traded funds.

 

Invesco PowerShares Capital Management's Active U.S. Real Estate Fund (NYSE Arca: PSR) began trading this morning, offering the first "active" competition to the major REIT exchange-traded funds.

PSR will select from securities in the FTSE NAREIT Equity REITs Index (FNER), using the broader index to select a more concentrated portfolio of 45-55 REIT stocks. It will also have the discretion to hold a significant portion of its assets in cash, if the managers determine that's needed. The fund will disclose all trades at the end of each trading day. (See earlier article, "PowerShares Files To Launch First Active REIT ETF,"  here.)

The timing of the launch is interesting, as the real estate markets have been beaten up to a greater extent than the broad equities market this year. The beating has been partially deserved, and some real estate managers believe, partially exaggerated as a result of real estate's public profile as the cause of the worldwide market meltdown. PowerShares and other real estate managers may think that real estate is near or at a bottom and now is a good time for investment.

How does PSR compare to its competition?

There are 12 domestic REIT ETFs, but in reality, four dominate in assets:

  • Vanguard REIT Index ETF (NYSE Arca: VNQ)
  • iShares Cohen & Steers Realty Majors (NYSE Arca: ICF)
  • iShares Dow Jones U.S. Real Estate Fund (NYSE Arca: IYR)
  • SPDR Dow Jones Wilshire REIT ETF (NYSE Arca: RWR)

PSR's "active" tag not only comes with a more concentrated holdings list than most of the other REIT funds, but a relatively high expense ratio of 0.80%.

Here are the holdings, assets and expense ratios for the four leading REIT ETFs:

 

ETF

Holdings

Assets

Expense Ratio (%)

VNQ

97

$1.8 billion

0.10

ICF

31

$1.1 billion

0.35

IYR

79

$1.1 billion

0.48

RWR

85

$ 704 million

0.25

 

PSR's 0.80% certainly stands out, especially compared to the Vanguard fund, which is priced at just 0.10%.

What distinction is an investor getting for PSR's high fees? Despite tracking different indexes, the ETFs have strong overlap in their top holdings, including with PSR.  

VNQ and ICF have only one holding in their Top Ten not also among PSR's top ten: Vornado Realty Trust. PSR has Healthcare REIT Inc. in Vornado's place. IYR is the most distinct: While it includes Vornado, unlike PSR, it has several differences with all of the other major REIT ETFs, holding Annaly Capital Management and Plum Creek Timber Co. among its Top Ten.

Keep in mind, however, PSR will be able to turnover its portfolio more actively than the passive funds. PowerShares predicts annual turnover could range between 50% to 125%, a huge difference from a passive REIT ETF's turnover range of less than 15% annually.

With the markets as wild as they have been, PowerShares is playing up its ability to steer clear of certain real estate sectors, such as residential, which may negatively tilt the performance of an index fund.

Wild markets certainly present opportunities for savvy managers. PowerShares likely doesn't expect much in the way of inflows into its new fund right now; rather, it plans to establish a performance track record with the hope of gaining flows down the line.

In its first morning of trading today, NYSE Arca showed no activity in PSR through 12 p.m. ET.

The prospectus is available here.

 

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