Friday, October 14, 2016

Personal thoughts on Phillip SGX APAC Dividend Leaders REIT ETF

The folks at Phillip Capital Management invited financial bloggers to a session where they introduced us to this ETF which just ended its offering period yesterday to quite a red-hot reception from investors. Many other bloggers are talking about this ETF, so I will just say a few words about this new product.

Let's start with the negatives :

a) Dividend yield of 4.5-5% does not make my heart sing.

The fund is not really attractive for high yield investors in a market where a REIT like Fraser Hospitality Trust can give more than 8%  when bought directly from SGX. However, management has asserted that it is reasonable to expect about 5% growth in dividends over time, which makes this REIT more attractive to investors who are not so much looking at dividend yields but dividends growth.

b) Expense ratio of 0.65%is on the high side for an ETF.

The fund expects an expense ratio of 0.65% which is more than double that of the STI ETF. But the management is not completely passive because the manager needs to react to the occasional rights issues which come about by every now and they promised that they will subscribe to issues which would be advantageous for the investor.

Management has assured us that expense ratios of ETFs can drop as the size gets larger and operations become more efficient. My skeptical nature believes that expense ratios will drop when there is more competition in the markets from other REIT ETFs.

c) 60% allocation to the Australian market introduces some country risk.

As the fund is fundamentally indexed via net dividends declared, the REITs with the largest dividend payouts tend to be clustered in Australia. This makes the fund less diverse and introduces more AUD forex risk. Personally, it's not so much of a big deal because most of my REITs are local so I would benefit from more diversification if I introduce this into my portfolio.

d) At least for the Singapore REITS component in the ETF, you lose the tax benefits from investing directly in them.

This revelation actually makes me angry, but my anger is not directed at the ETF manager. Basically when you buy a local REIT, you are not taxed at a personal level. If the REIT declares 90% income as dividends, it is not taxed at the corporate level as well. When you buy a basket of local REITs through an ETF, it attracts corporate taxation of 17% at the fund level which really sucks for the folks who need more diversification.

However, the asset allocation to Singapore is not particularly high, so it may not be such a big concern.

Now we've gone through the negatives. At least from my point of view, the ETF launch is a net positive for Singapore. Fund managers cannot sustain themselves through active investing funds because the costs is too damn high. This REIT ETF is one of the first ETFs that bring fundamental indexation and Smart beta to Singapore markets which is great because it allows a new kind of tactical asset allocator to emerge amongst retail investors.

I can definitely see who would be best suited to this product :

a) You are into the Permanent Portfolio investment strategy.

You can now build an Equity, Bond, REIT and Commodities portfolio using a combination of the STI ETF, Asian Bond ETF, this REIT ETF and Lyxor Commodities ETF to create a portfolio to weather any possible economic situation.

I think this REIT plays best to investors who like this strategy.

b) You already have a fairly decent local REIT portfolio and want to reach overseas.

If a person already has a fairly sizeable local REIT portfolio, this product gives you some amount of diversification towards international REITS. And you only need to hold one counter to start diversifying your holdings to Australia and Hong Kong.

c) You want to arbitrage the ETF against its constituent counters.

Right now I am not sure whether this would work. A REIT ETF might be valued at an amount lower than the underlying net assets value. Phillip says that the NAV would be published on their website soon enough so there is a distinct possibility of buying $1 worth of REITS with 99 cents, but I'm not sure whether Phillips will also play the role of a market maker in the markets to prevent arbitrage from taking place.

d) You keep pestering financial bloggers which is the best REIT to buy

This ETF certainly provides a better answer from me in the past which is "Buy as many small positions for all the REIT counters in SGX. This will eliminate the need to micromanage your investments."

If you are too lazy to read up on the prospects of individual REIT counters, paying an expense ratio of 0.6% for a nice 5% yield is reasonable price to pay because you can spend your time on more profitable pursuits.

Anyway, I will be putting my money where my mouth is and will buy at least one small lot at least to keep this ETF in my radar.

[ This REIT is the first of a new kind of Smart Beta ETF which I wrote about months age here ]







2 comments:

Bruce said...

"Asian Bond ETF, this REIT ETF and Lyxor Commodities ETF to create a portfolio",
are Asian Bond ETF, Lyxor Commodities ETF listed on SGX? what are their codes?
is the following correct: ABF SG Bond ETF (SGX: A35) and Lyxor Cmdty @US (A0W).

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