Choosing From The Three Singapore REIT ETFs

In my post on the Singaporean Variations of the Core-4 portfolio, I attempted to adapt the Core 4 portfolio for a Singaporean investor.

The classic core 4 portfolio is basically a Boglehead Three Fund Portfolio with a fourth REIT asset class added to it.

If you do not know what a Boglehead three fund portfolio is, do check this post where I also suggested several variations for a Singaporean investor.

Currently, we have three REIT ETFs listed in the Singapore Stock Exchange

  • Lion Phillip S-REIT ETF (CLR)
  • NikkoAm-StraitsTrading Asia ex Japan REIT ETF(CFA / COI )
  • Phillip SGX APAC Dividend Leaders REIT ETF (BYJ / BVI)

The only similarity between all three funds is that they are all holding REITs. All three ETF track different benchmarks and have different fund objectives.

So it is not going to be an apples-to-apples comparison.

Nevertheless, I would like walk you through the selection process on how to choose a suitable REIT ETF for your portfolio.

#1 Why – Aligning The Purpose Of The Fund With your Portfolio

Why do you want to add a REIT ETF into your portfolio?

Note that I am not asking between why holding a REIT ETF or just holding REITs individually. If you are looking for that it will be a topic for another day. Chances are if you prefer a three-fund portfolio, you may want to hold REIT ETFs than individual REITs.

What I am asking is why would you want to add a REIT asset class in your stocks and bonds portfolio? For diversification? Or is it for the additional yield or income generated by REITs? Or for exposure to certain factors indirectly via REIT which you cannot normally do so with stocks?

The investment objective of all three REIT ETFs is to track the their benchmark index as closely and as efficiently as possible.

However, the three indices tracked by these ETFs are quite different from each other. So understanding each index will give a clue on what the index was designed for and whether it aligns with our purpose.

FTSE EPRA NAREIT Asia ex Japan REIT index – Plain Vanilla Index

NikkoAM-StraitsTrading Asia ex Japan REIT ETF (CFA / COI ) tracks the FTSE EPRA Asia ex Japan Net Total Return REIT index.

This index is a free-floated adjusted, market capped weighted index designed to track the performances of REITs listed in Asia excluding Japan (and excluding also Australia and New Zealand although not explicitly mentioned).

Promotional material about the index from Nikko AM

This index is a carve out of the EPRA NAREIT global real estate index series which is a widely used benchmark for real estate. The basic purpose of this index is to represent the performance of REITs listed in the Asia ex Japan region.

Ok, it is actually a 10% capped index which means the any REIT that is larger than 10% is capped at 10%. The full name of this index is FTSE EPRA Nareit Asia ex Japan REITS 10% Capped Index (factsheet). But it is close enough to market-cap-weighted.

The selection criteria is basically REITs from this region (Asia ex Japan) with minimum liquidity.

Source: Methodology Overview from the FTSE Russell website

Majority of the REITs (60%) are listed in Singapore, followed by Hong Kong (22.5%), China (8%) and other Asian countries.

Source: Brochure from nikkoam.com.sg

If you want diversification across countries in Asia and want to follow a passive REIT index investment strategy, this ETF would meet your requirements.

iEdge APAC ex Japan Dividend Leaders REIT Index – Dividend Focused Index

The Phillip SGX APAC Dividend Leaders REIT ETF (BYJ / BVI) tracks the iEdge APAC ex Japan Dividend Leaders REIT Index.

The difference of this index from the previous is that it is not a market cap weighted but a fundamentally weighted index – weighted by total dividends paid in the preceding 12 months.

The objective is to generate better returns than a traditional market-cap approach. In other words, it aims to beat the market with smart beta strategies.

Source: phillipfunds.com

And by ex Japan, this index includes Australia and New Zealand unlike the FTSE EPRA NAREIT index. Around 45.8% are listed in Australia followed by 36.2% in Singapore and others (source from phillipfunds.com as of May 8 2020)

The constituents had changed quite a bit since Mar 24 2020 when seedy published the Ultimate Singaporean Guide to Investing in ‘Em. It was rebalanced recently from Mar 23 2020 so probably the chart was just updated.

In theory, this sounds great if you are looking to maximize your returns based on dividend paid.

I have no knowledge about weighing and ranking by total dividends paid, but it sounds like it will yield similar results to market cap weighting methods.

After all, larger REITs will pay more dividends. So they will get more weight. Smaller REITs, even those which had higher yields might still pay out smaller dividends compared to larger REITs with lower yields.

Looking up Morningstar, it looked like this index favors large cap with 63% allocated to large caps.

The Phillip SGX APAC Dividend Leaders contains 63% large cap. source: Morningstar
Compared to NikkoAM-StraitsTrading Asia ex Japan REIT which is tracking a traditional market cap weighted index.

Since I have no idea, I will give it the benefit of doubt and assume it works well.

If you are looking for a smart beta strategy with a focus on dividends and diversifying across REITs listed in multiple APAC regions, you could consider this ETF.

Morningstar® Singapore Yield Focus Indexsm

The Lion-Phillip S-REIT ETF (CLR) tracks this index. Unlike the first two, this index is more niche and only chooses REITs listed in Singapore.

Singapore REIT does not mean that the assets will be Singapore properties. It just means that it is listed in SG. A lot of the Singapore REITs own and operate properties in multiple geographies and countries, e.g. Mapletree Logistics, Ascendas REIT, Manulife US REIT etc etc…

Although many of the REITs own predominantly Singapore properties, you still do get some diversification in other geographies and might be still exposed to small amounts of currency risks. But you will not be subjected to foreign withholding taxes, assuming you are a tax resident of Singapore.

This index is also not a traditional market-cap-weighted index but a fundamentally weighted index. Instead of iEdge’s dividend paid methodology, this index screens REITS for three factors – quality, financial health and dividend yield.

  • ‘Quantitative moat’ – quality
  • ‘Distance to Default’ – financial health
  • Trailing 12-month dividend yield

Again, like the iEdge index, this is a smart beta approach designed to enhance risk adjusted returns over the market cap approach.

The Construction Rules for this index from Morningstar is attached below.

The quality factor here used by Morningstar is specifically defined as ‘Quantitative Moat’. Their definition is:

Only companies with an economic moat—a structural competitive advantage that allows a firm to earn above-average returns on capital over a long period of time—are able to hold competitors at bay.

Appendix 2: Morningstar Economic Moat Rating – Morningstar Singapore Yield Focus Index Methodology

This is calculated based on Morningstar’s equity research analysts ratings.

The second factor (Financial health) is defined as ‘Distance to Default’ which is their term for capability of a firm meeting its financial obligations and the possbility of it going default.

Lastly, the third factor is dividend yield for the trailing 12-months.

Source: ETF quarterly update report lionglobalinvestors.com

In other words, this index selects REITs with competitive edges, good financial health and good dividend yield. Sounds like not a bad deal.

However, due to its limited selection pool of only Singapore REITs, you might be susceptible to changes in local regulation, i.e. if the Singapore regulatory authorities decide to change rules governing REITs which might affect REITs profitability.

The historical performance of Singapore REITs has been better in this region hence this ETF had high yields and decent gains. However, should there be a day in the future where Singapore REITs no longer outperform REITs in other regions, the two other ETFs will adjust their weights to favour the better performers whereas this ETF is limited to just the Singapore market.

If you want to focus on getting high-quality REITs from the Singapore market, this ETF would be an ideal choice.

Note on Sector Breakdown

I did not mention any sector breakdown in my quick analysis of all three indices. Some of us may be afraid of investing in retail and hospitality REITs because these sectors were worse affected by COVID-19.

And all three indices have a significant portion of the retail sector >20% but they are all well diversified.

The high allocation to retail is not because the creators of the index intentionally chose so – there is no requirement or quota for allocation for each sector. The high percentage is due to the performance of the retail REITs before COVID-19.

The system here is just like a jungle – the survival of the fittest. The high performing REITs will gain more weight and the low performing REITs might be pushed out of the index.

So, if a certain sector does well, more weight will be allocated to it and if it does poorly, lesser weight will be allocated naturally. So I will not be surprised if the sector allocation changes considerably next year.

Note On Factor Exposure

On paper, if you want to pursue a smart beta strategy then you are only left if the Phillip ETF and the Lion-Phillip ETF. This is because the underlying index for NikkoAM REIT ETF is a plain vanilla market-cap-weighted index.

However, I will say that you should not eliminate NikkoAM REIT ETF completely yet because the index is indirectly exposed to certain factors even though it is not actively pursuing a smart beta strategy.

Studies had shown that REIT asset class has some indirect exposure to value, small, term and credit factor.

If you look at the factor analysis of NikkoAM’s ETF, you still see certain factor exposure.

NikkoAM-StraitsTrading Asia ex Japan REIT ETF has some indirect factor exposure to value, high yield, low volatility and small. Source Morningstar

Compared to Phillip SGX dividend leaders REIT ETF

Phillip SGX APAC Dividend Leaders ETF has a tilt to high yield (not surprising there) and some value and small factors. Source Morningstar.

So, the moment you add REITs you will gain the factor exposure whether you were intentionally looking for it or not.

Note On Performance And Yield

Past performance does not guarantee future performance. A comparison of performance between all three ETFs is also not an apples-to-apples comparison.

From Morningstar.com, the 12 month trailing yield of Phillip SGX APAC Dividend Leaders is 6.10%, followed by Lion-Phillip S-REIT ETF with 5.78% yield and lastly NikkoAM StraitsTrading Asia ex Japan REIT ETF at 4.89% yield.

It could be that the first two ETFs dividend/yield focused index methodology might be working better to maximize yield than the plain vanilla market cap weighted REIT index.

However, Newacademy of Finance had made a comparison between all three in this article on 4 Mar 2020 and found that the Phillip SGX APAC Dividend Leaders ETF had a yield of 3.5%, the lowest of all three.

This particular ETF had fallen in price (more compared to the other two ETFs) since then hence the yield had increased significantly. So, high dividend yields could be also due to fallen prices.

Initial Verdict

If you are looking for a basic Asia REIT, the Nikko REITs ETF is the Choice.

If you want to select high quality REITs from the Singapore only then the Lion-Phillip Reit ETF is a straightforward choice.

If you want a dividend maximization strategy and diversification of REITs in Asia Pacific, then Phillip SGX dividend leaders ETF can be a consideration.

#2 Efficiency Of ETF

The next selection criteria to look at is efficiency of the ETF.

Efficiency of the ETF can be broken down into two parts:

  1. Total Expense Ratio – how much it costs annually
  2. Tracking error – how well it tracks the benchmark

Efficient ETFs tend to have low costs and low tracking error.

Total Expense Ratio

For cost, the first thing we would look at is the total expense ratio (TER) which is the total annual expenses divided by the price.

The Phillip SGX APAC Dividend Leaders ETF immediately stands out with 1.18% TER. On the Phillip website, only the management fee of 0.30% is mentioned. I had to dig into the annual report to find out the total operating expense for the fund.

Phillip SGX APAC Dividend Leaders Financial Statements 30 Sep 2019

This is a deal breaker for me because keeping costs low is the key to long term investing.

Typical passive low costs ETFs range ~0.20% and below.

However, the other two ETFs both have a TER of 0.60% which is still quite high for a passively managed ETF.

Lion-Phillip S-REIT ETF Financial Statements 31 Dec 2019
NikkoAM-StraitsTrading Asia ex Japan REIT ETF Financial statements 30 June 2019

Without any other options, the lowest expense ratio for our REIT ETFs is 0.60%.

Tracking Error

Tracking Error simply is the difference of the performance of the ETF compared to the benchmark that it tracks.

Out of the three, Lion-Phillip had the lowest tracking error. Closely followed by NikkoAM. The Phillip ETF had the highest tracking error among the three.

ETF 1 Yr Performance Difference vs Index
Lion-Phillip S-REIT ETF0.50%
NikkoAM-StraitsTrading Asia ex Japan REIT ETF0.64%
Phillip SGX APAC Dividend Leaders ETF2.40%
NikkoAM-StraitsTrading Asia ex Japan REIT ETF annual report 30 June 2019

The lower the tracking error, the better the it is at tracking the benchmark.

#3 Liquidity And Fund Size

The more liquid the ETF, the easier it is to sell and get back cash. Normally, it wouldn’t be a huge deal. But when the market crashes, more illiquid ETFs can see their prices drop drastically.

The bid-ask spread is a measure of liquidity of the ETF. It is defined has the difference between the highest price a buyer is willing to pay for the ETF and the lowest price the seller is willing to sell for the ETF.

The lower the spread (the difference between bids and asks), the more liquid the ETF is, and the less it would cost to trade the ETF.

The higher the spread, the more costly it will be for trading the ETF because you will have to pay for the spread for each trade.

All three ETFs have tight spreads and they each have a designated market maker to close the spread.

The total assets under management (AUM) is the size of the ETF. The larger the AUM, the larger the ETF. Large ETFs can benefit from more economies of scale which can help lower costs.

As seen from our three ETFs, NikkoAM is the largest with 220.11 million assets followed by Lion-Phillip S-REIT ETF with 140.29 million. Phillip SGX APAC Dividend Leaders is the smallest with 11.5 million and it also has the highest TER probably because of that.

Also, the smaller the fund, the higher the chance of it being liquidated and closed. So if a ETF continue to grow smaller due to outflows of funds, the ETF might be closed because the operations might no longer be sustainable.

Conclusion – The Verdict

The choice for me is actually between the two ETFs: NikkoAM-StraitsTrading Asia ex Japan REIT ETF and Lion-Phillip S-REIT ETF.

My reason for eliminating Phillip SGX APAC Dividend Leaders ETF is the high TER of 1.18%.

So if my goal is diversification, I would choose the NikkoAM REIT ETF. It provides a comprehensive exposure to REITs in the Asia ex-Japan region. If only the TER would be lower then I would definitely choose it over the Lion-Phillip S-REIT ETF.

If my goal is to maximize my yield, then I would choose the Lion-Phillip S-REIT ETF. For the same cost (TER) as the NikkoAM REIT ETF, I get an additional screening for quality, financial health and dividend yield REITs from Morningstar, provided their methodology works well. The only limitation is that I only get Singapore listed REITs. So if Singapore REITs continue to do better in the future, this REIT would be the best choice.

So it comes down to preference, either two is fine for me. Or in fact, why not choose both?

What do you think? Let me know which is your choice in the comments.

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Author: Fatty's Finance

Finance is like health. It becomes an issue if it is not well maintained. I want to help you get back in shape!

6 thoughts

  1. Hi

    I am personally tilting towards CLR as well.

    But based on your views, do you think it’s a good time to enter the market now? Or will you forecast a further drop in price with the ongoing pandemic?

    Thanks!

    1. Hi Koala,

      I am quite bad at market timing. For now, all three REIT ETFs are trading at much lower prices because all the reduced DPU and earnings had been priced-in. So, now would be a better time to buy than in Feb if the situation will get better after many countries start to re-open. However, if the situation worsens and another second wave of outbreak forces us back into lockdown, then the prices may drop. So, I really do not know.

      I am optimistic that things will improve in the future. Even if some areas like retail, office or hospitality were to be permanently affected by COVID, I think businesses will continue to adapt to the changing environment and some may start to convert these empty spaces into something more profitable. They own space or land which can be converted into something else.

      Personally, I had bought some recently (last week) not because of market timing, but as part of my ongoing monthly contribution to my investments.

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