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FlexShares, the ETF brand from Northern Trust, has been rapidly expanding its lineup as of late, putting out several new funds. This trend continues into November with the latest addition from the firm with the FlexShares Global Quality Real Estate Index Fund- GQRE.
This brand new product is the first such real estate fund for FlexShares, though it is by no means their first product with a global focus for the company. In fact, several of FlexShares' other funds—such as its natural resources fund (GUNR) and its broad infrastructure index fund (NFRA)—have broad exposure to global markets, so GQRE is definitely continuing with this trend, and appears to be a natural fit for FlexShares and their lineup.
GQRE in Focus
The product is an interesting addition to the broad real estate ETF world, and it looks to be a little different than some of the others currently on the market. In particular, this fund looks to have a focus on ‘quality’ real estate companies and it seeks to avoid ‘value traps’ with this approach (see all the Real Estate ETFs here).
This is done by looking at real estate firms that have significant strength in profitability, management expertise, and cash flow. Additionally, value and momentum factors are also taken into account, while industry, country, and region factors are also weighed too. In terms of costs, the product will charge investors 45 basis points a year in fees, in line with many others in the global real estate space.
In terms of the portfolio, Public Storage (PSA), Weyerhaeuser (WY), and Boston Properties (BXP) take the top three spots, accounting for roughly 12.9% of assets. This does mean that the portfolio has a decent level of assets in U.S. securities—roughly 46%-- though companies from Japan (12.6%), Hong Kong (12.4%), and the UK (7.8%), round out the rest of the top four from a nation perspective.
The product does have a bit of a large cap focus (43%) of assets, though mid and small caps both make up at least 26% of assets too. And from an industry perspective, real estate development and operations (37.6%), commercial REITs (36.2%), and specialized REITs (17%) account for the vast majority of the fund (see Top ETFs for the Real Estate Recovery).
"Research shows that a high-quality, value-focused portfolio of real estate securities may offer attractive returns with less volatility compared to traditional capitalization-weighted global real estate indices," said Shundrawn Thomas, head of Northern Trust's FlexShares Exchange Traded Funds Group in a press release. "GQRE provides investors a disciplined approach for investing in global real estate equities."
How does it fit in a portfolio?
The fund could be an interesting pick for investors seeking a decent yield, and a high level of safety thanks to the focus on quality. This focus may help the product to outperform its peers should we face some turbulence in the broad real estate market.
However, investors who are looking for heavy international exposure might be a little disappointed with this product, as close to half the portfolio is in U.S. securities. Additionally, it isn’t the cheapest choice by any stretch, as there are others in the space that have far lower expense ratios, though it is cheaper than others in the global category (see The Introductory Guide to Real Estate ETF Investing).
ETF Competition and Bottom Line
Top products in the real estate space that have a global focus include the Cohen & Steers Global Realty Majors ETF (GRI) and the SPDR DJ Wilshire Global Real Estate ETF (RWO). The SPDR product has over $100 million in assets, while RWO has cracked the $1 billion level, suggesting that investors have embraced these products so far.
However, both do have expense ratios that are elevated compared to the new FlexShares fund, while neither has a focus on ‘quality’ like GQRE. Thanks to this differentiation, the FlexShares product may be able to attract a decent level of assets, though some outperformance compared to its more established peers—and a solid yield—will definitely be necessary for this to happen.
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