SRET - SRET: Bullish On REITs Vs. Homebuilders But Not With This Fund

2023-07-26 16:02:32 ET

Summary

• Since its inception in 2015, Global X SuperDividend® REIT ETF has been successful in tracking its benchmark index.
• However, this successful tracking has not necessarily translated into investor satisfaction.
• I think there are better ways of playing REITs here.

I've talked about the potential for real estate investment trusts, or REITs, more broadly to be a relative outperformer against Homebuilders ( XHB ) in the past, and thought it might be worth looking at one way of playing the space. Global X SuperDividend® REIT ETF (SRET) aims to replicate the performance of the Solactive Global SuperDividend REIT Index, which, in turn, seeks to invest in 30 of the highest yielding securities globally.

SRET's Performance

Since its inception in 2015, SRET has been successful in tracking its benchmark index. However, this successful tracking has not necessarily translated into investor satisfaction. According to Morningstar , while the fund did well at the onset relative to its peers, it had a difficult time from 2019-2021.

I typically like to see funds that have done poorly for a few years on a mean reversion play, but there's more to thinking about investing in the fund than just that.

Diversification and Geographic Allocation

One noteworthy aspect of SRET is its geographic allocation. While the exchange-traded fund ("ETF") can invest anywhere globally, it typically allocates most of its portfolio to U.S. REITs, which adds a degree of stability to the fund's overall volatility. Europe and Asia, as expected, have been drags largely from an asset allocation perspective.

High-Yielding Stocks and Their Risks

High-yielding stocks often carry speculative, high-risk characteristics. The fund historically has had large exposure to mortgage REITs, but has reduced that over time. Healthcare REITs make up the largest allocation currently. I do think Healthcare REITs have a lot of attractive features, so that's a plus, but exposure to mortgage REITs and office REITs remain problematic. In addition, if consumers are about to tap out as I suspect they will, the 10% allocation to REIT ETFs could also be a meaningful drag over time.

A Look At SRET's Holdings

SRET's holdings are diverse, and weighted evenly across the board. This kind of diversification is increasingly important in a portfolio given ongoing concentration risk in traditional stock market benchmarks like the NASDAQ which have been largely driven more by idiosyncratic company-specific momentum that underlying real momentum strength. Holdings here skew more towards mid and small-cap REITs, which again I personally favor given potential longer term market cap rotation.

The Verdict: To Invest or Not?

I think there are better ways of playing REITs here. The mortgage REIT exposure unfortunately really damaged the fund's overall long-term performance, and relative to a more plain-vanilla REIT ETF like iShares U.S. Real Estate ETF (IYR), we can see that its higher yield appeal hasn't been much of an edge.

Despite its attractive features, SRET's performance and overall allocations historically are cause for concern. The fund could certainly do well and perhaps current allocations are the right place to position, but I don't see much of an edge against cheaper and more basic REIT funds out there. As such, while REITs may appear attractive, SRET may not be the best way to capitalize on their relative outperformance.

Having said all that, as is usually the case, the future can surprise. If we avoid recession and consumer strength continues, the office REIT exposure and consumer side might do well. I'm just doubtful.

For further details see: