Over the years, Singapore has grown into a haven place for many Real Estate Investment Trusts (REITs).
REIT as an attractive asset class is fast becoming one of the most sought-after assets by investors due to the steady stream of income distributions they payout.
As a result of the favorable tax regime and rising pent-up demand from hungry yield investors, SGX has attracted many REITs to list in the Singapore market.
The CSOP iEdge S-REIT Leaders Index ETF is a Sub-Fund of the CSOP SG ETF Series I Unit Trust.
The Sub-Fund is a passively managed index-tracking ETF with an investment objective of replicating closely the performance of the iEdge S-REIT Leaders Index (the “Index”).
There is currently a total of over 40 REITs in Singapore and suffice to say that for someone who wants to get a diversified portfolio of REITs this would be a challenging task to buy most of them as the trading commissions would add up.
This is where you can consider the CSOP iEdge S-REIT Leaders Index ETF.
Here are seven things that you need to know about them before you invest.
There are several unique selling points on the characteristics of the ETF.
For example, semi-annual rebalancing of the index is done mainly based on the following factors:
- Free-float as a % of market cap
The index’s methodology requires the S-REITs to be:
- Free float market cap >= $500m
- Free float >= 20%
- Daily Trade Velocity > 0.1% (Daily Traded Velocity is defined as the median daily traded value over the last 6 observation months over the median free-float market cap)
The iEdge S-REIT Leaders Index was previously known as the iEdge S-REIT 20 index. It was modified to include the smaller REITs to give a better representation of the REIT market, as well as to include the most traded REITs since July 2020.
Primarily, the index was created to form a liquid representation for the S-REIT sector, and the liquidity adjustment helps to capture alpha and sector rotation in large-mid S-REITs that had attracted investors’ fund flows.
The ETF re-weights the S-REITs by a liquid-adjusted free-float market cap method semi-annually.
- Quartile 4 – most liquid, hence the index gets a higher adjustment factor (1) and a bigger weightage.
- Quartile 1 – least liquid, hence the index gets a lesser adjustment factor (0.25) and a lower weightage.
The beauty of this method is that actively traded, and more liquid REITs get a bigger allocation that aligns with investors’ interest in the REIT.
The iEdge S-REIT Leaders Index ETF is a diversified and return-focused ETF that provides investors with exposure to some of the most important uprising industries in real estate in different geographical locations, with Singapore being the core with two-thirds of the current allocation.
This includes exposure to other geographical locations such as United States, Australia and China – some of the biggest or matured regions for real estate.
The index constituents will also have their weightage capped at 10% for diversification purposes.
The index has several large-mid S-REITs with bigger weightage and large-mid S-REITs with a larger scale that outperformed smaller ones in history.
The liquidity adjustment tilts, therefore enhancing the weighting towards the large mid-cap S-REITs – to create a more liquid portfolio, better reflect investors’ interest and a potentially higher dividend / capital appreciation opportunity.
Over the last 10 years (as of 30 September 2021), S-REITS have averaged an annualized total return of 10.7% and volatility of 13.3%, commanding a respectable comparative advantage against major peer indexes. (Source: Bloomberg)
As of 30 September 2021, the historical dividend yield for the iEdge S-REIT Leaders Index is at 5.1% for the trailing 12 months, improving from 4.6% for 2020. (Source: Bloomberg)
The ETF’s index also had a lower annualized volatility than all of its underlying individual REITS, standing at 12.5%.
The Index covers the largest S-REITs, which are primed for more growth to further consolidate their scale advantage.
For instance, historical returns showed that large and mid-cap S-REITs in Quartile 1 have a better risk-return adjusted profile as compared to the small and mid-cap REITs.
Furthermore, the Index’s weighted average leverage ratio is also at a comfortable gearing of slightly more than 36%, well below MAS regulatory cap at 50%. This allows further room for the REITs in the portfolio to grow through acquiring more properties.
Comparing the performance against its peers, it has also exhibited strong historical returns and an attractive expected dividend yield that is higher than the rest with relatively lower volatility.
When it comes to tracking an index, you would want an ETF that has minimal tracking errors (do note this exclude fees and other charges).
For instance, if an index goes up by 5%, you would ideally want your ETF to grow likewise by similar percentage points as closely as possible.
In the case for iEdge S-REIT Leaders Index ETF, they are adopting a replication strategy to minimize the tracking error.
Using a replication strategy, the manager will invest in substantially all the index securities with the same weightings as the index.
One of the most important considerations when investing in an ETF is the expense ratio fees.
This determines how much as an investor you would be charged (usually deducted annually as fees).
A high expense ratio can affect an investment rather significantly over time.
A good rule of thumb is to avoid investing in ETFs that have a total expense ratio above 1% and since most ETFs are passively managed, they should not command an expense ratio that is above 1%.
For this ETF, it has a management fee of 0.5% and management has also capped the total expense ratio at 0.60%, which would be deducted annually as fees.
This ETF is available in two main currencies – SGD and USD.
Depending on which currencies you prefer, you would be able to invest in the ETF with a SGD denomination under the stock ticker SRT and USD denomination under the stock ticker SRU.
To summarize, I think this is a good way to get exposure to a geographical/sector diversified real estate exposure if you are intending to get one.
The ETF offers a liquidity-adjusted exposure to large and mid-cap REITs with quality assets and management, which will drive long-run total returns.
The initial offering period for this ETF will start from 29th Oct – 15th Nov (2.30pm).
If you are interested in the ETF, you may submit your subscription orders through the following participating dealers listed below.
Listing for the ETF will commence on 18 Nov 2021.
Disclaimer: This article is written in collaboration with CSOP AM.