What about real estate ETF investment strategies?

There are a number of strategies used by ETFs that are not available to other real estate fund managers, which provide the ETF with more flexibility to react to market changes. ETF fund managers can follow a very passive strategy, these funds track an index, but funds can also be actively managed. There is no limit as to how actively they can manage the portfolio to focus on alpha strategies.

Figure: alpha-beta strategies road map

Source: Deutsche Bank, 2012
For example the majority of real estate ETFs are passive investments, meaning they track a benchmark index. Examples for passive beta strategies are:

  • iShares FTSE EPRA/NAREIT Asia Property Yield Fund
  • iShares FTSE EPRA/NAREIT Developed Markets Property Yield Fund
  • iShares FTSE EPRA/NAREIT UK Property

Few funds use a different approach than market capitalisation, considered smart or adjusted beta such as

  • BMO Equal Weight REITs Index ETF (ZRE-TSX)
  • PowerShares KBW Premium Yield Equity REIT Portfolio

There is currently only one true active fund, which differs in the asset allocation approach:

  • PowerShares Active U.S. Real Estate Fund

Invesco’s PowerShares Active US fund uses quantitative and statistical metrics to identify attractively priced securities and manage risk.
Physical ETFs can use the full spectrum of asset allocation tools for increasing or decreasing exposure to a specific style, sector or capitalisation

  • Sector rotation strategies
  • Arbitrage strategies
  • Hedging and defensive strategies
  • Stock-lending revenue strategies (from short sellers)
  • Market neutral strategies
  • Maintaining exposure during a manage transition
  • Hedging tools for shorting
  • Transition management

Being able to sell stocks shorts, provides the ETFs with downside protection in a crisis.

Synthetic ETFs

on the other hand are not based on stocks directly. They deliver the performance of the index they track via a swap contract. This technique allows them to have a smaller tracking error than conventional funds. The ETF manager builds a so-called “substitute basket” – sometimes also called “collateral basket” – these are assets of good credit quality delivering a low but risk-free return. In addition he enters into a swap contract with a counterparty – normally an investment bank – whereby it exchanges the performance of such a basket for that of the index.


Not all ETF’s are based on stocks. Some are based on derivatives, such as options and futures. For example commodity ETFs use futures to replicate the performance. The use of derivatives allows leveraging to do a multiple of what the market index does. Leveraged ETF’s seek to make 2 or 3 times the return of their target index, while leveraged inverse ETF’s seek to earn a multiple when the target index declines.
While these types of ETFs are much more common for commodities, there are currently only a couple of real estate ETFs using leveraged performance. Two noteworthy examples are applying a beta multiplied strategy are:

  1. Direxion Real Estate Bull 3X – Triple-Leveraged ETF
  2. Direxion Real Estate Bear 3X – Triple-Leveraged ETF

These funds deliver 300% (3x) of a selected benchmark index. They create short positions by investing at least 80% of their assets in derivatives: such as futures contracts; options on securities, indices and futures contracts; equity caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements (REPO); exchange-traded funds (“ETFs”); and other financial instruments that, in combination, provide leveraged and unleveraged exposure to selected index. The remaining is typically invested in short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including government securities and repurchase agreements.
Leveraged ETF’s are generally used for short-term trades — not as long-term investments, since markets go up and down, so gains and losses are both amplified.
The largest provider of physical real estate ETFs is Blackrock through it’s ishare brand. Main stock exchanges are NY, London and Canada.
Figure: Fund manager and number of funds


Source: Nicole Lux

Next week: AUM, how large is the investment universe, what about performance?

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