iShares US Property Yield ETF USD Dist GBP (LSE:IUSP) - ETF price


ETF Report

iShares US Property Yield UCITS ETF USD (Dist) (GBP) IUSP

AnalystReport

PortfolioConstruction

The FTSE EPRA/NAREIT US Dividend+ Index offers exposure to dividend-screened listed real estate companies and REITs from the United States. Eligible securities must have a one-year forecast dividend yield of at least 2%. The index is a free-float market-capitalisation-weighted index and is reviewed quarterly. Component stocks have to meet a series of liquidity criteria on two consecutive quarterly reviews before they are included in the index. At the time of writing, the index held 123 individual stocks. The biggest single issuer exposure is Simon Property Group, representing 7% the index value, followed by Prologis at 6%. All remaining exposures are below 5% of the overall weighting.

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Fees

The fund has an ongoing charge of 0.40%, making one of the cheapest funds in the category. This means it maintains a considerable cost advantage when compared with active peers. It is worth noting that the fund has outperformed its benchmark index over certain time periods. This outperformance can be mainly explained by the differences in withholding-tax treatment between the methodology of the fund and that of the index, as well as securities-lending revenues. Other potential costs for the investor include bid-ask spreads and brokerage fees when buy and sell orders are placed for the ETF.

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FundConstruction

IShares US Property Yield ETF uses full physical replication to track its reference index. This means the fund invests in all of the constituents of the FTSE EPRA/NAREIT US Dividend+ Net Return Index in the same weightings as in the index. The fund uses futures for cash management purposes. This is standard practice and helps limit tracking error. IShares engages in securities lending and can lend up to 100% of the securities within this fund to improve its performance. The gross revenues generated from this activity are split 62.5/37.5 between the fund and the lending agent BlackRock, whereby BlackRock covers the costs involved. Over the 12 months ended December 2018, the fund lent out 13% of its assets under management on average, with a maximum on loan of 24%, and generated a net securities-lending return of 0.02%. To protect the fund from a borrower's default, BlackRock takes collateral greater than the loan value. Collateral levels vary between 102.5% and 112.0% of the value of securities on loan, depending on the assets provided by the borrower as collateral. Additional counterparty risk-mitigation measures include borrower default indemnification. Specifically, BlackRock commits to replace the securities that a borrower would fail to return. The indemnification agreement is subject to changes, in some cases without notice. IShares holds a dominant position in the European ETF marketplace by virtue of its comprehensive offering. The fund management process is robust. We value the wealth of experience of the people behind it and the extensive internal network supporting the operation. Having said that, we take the view that the vast economies of scale generated by the BlackRock group could be better shared with investors in the shape of lower ongoing charges.

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Suitability

The iShares US Property Yield exchange-traded fund represents an adequate investment proposition by providing broad passive exposure to a market segment that hasn’t attracted many active managers. Choice in the indirect North American property Morningstar Category remains limited.

The FTSE EPRA/NAREIT US Dividend+ Index provides exposure to US REITs and listed real estate companies that have been screened by their one-year forecast dividend yield. The constituents must have a forecast dividend yield of at least 2%, which arguably represents a low hurdle given the obligation for US REITs to maintain high dividend payout ratios.

At the time of rating, the FTSE EPRA/NAREIT US Dividend+ Index, which is market-cap-weighted, held 123 of the 129 securities included in the unscreened FTSE EPRA/NAREIT US Index, so it closely resembles and retains the benefits of a purely passive offering, namely that it is broadly diversified and representative of the sector.

With an ongoing charge of 0.40%, the fund is among the cheapest offerings in the indirect North American property category, which, as of this writing, includes only 15 active and passive funds.

This low fee has helped the fund outperform its surviving category peers on a risk-adjusted basis over the trailing five- and 10-year periods. It should be emphasised that only four funds in the category have a 10-year track record, including this iShares ETF, and eight funds have closed over that period, causing a significant survivorship bias.

While we feel that by adding a leverage component and/or a measure of a company's ability to maintain or raise its dividend, the screening process could be improved, we remain confident that the fund will outperform its average category peer on a risk-adjusted basis over a full market cycle.

This is because it offers low cost and broad and representative market exposure to a category in which active managers have struggled to add value. For these reasons, we have awarded this fund a Morningstar Analyst Rating of Bronze.

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Fundamental View

This exchange-traded fund offers indirect exposure to the largest U.S.-listed retail, industrial, and office, real estate holding and development, and residential REITs.

Indirect real estate ETFs offer investors exposure to a traditionally illiquid asset class that has historically exhibited stocklike returns and bondlike income streams. These funds offer many advantages over directly investing in property, namely no required mortgage or maintenance, higher liquidity, and price transparency.

The passive indirect approach for accessing property investments is not without its drawbacks. For example, when investing in listed equity, the investor gains liquidity but simultaneously assumes additional stock market risk. This tends to increase both the volatility of returns and the correlation of the investment with the wider equity markets.

A second major drawback is that listed property firms, and in particular REITs, tend to be highly leveraged. Not only does this further increase the volatility of returns but it also amplifies the sensitivity to lending rates. In an environment of rising rates and rising borrowing costs, listed real estate may suffer more than other unleveraged yield-producing assets.

Alongside the regional specific supply and demand characteristics, the performance of nonresidential real estate is linked to economic activity. A key risk for REITs' long-term performance is the rapid growth of online commerce business. This can be expected to apply increasing pressure on the retail real estate segment, with lower overheads per unit sold and a higher bargaining power on the side of would-be buyers/renters.

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Alternatives

Investors seeking purely cap-weighted access to the US property market could consider the Lyxor EPRA/ NAREIT US ETF. This fund tracks the unscreened version of the FTSE EPRA/NAREIT US Dividend+ Index for the same ongoing charge of 0.40%.

A more exotic alternative is the iShares Target US Real Estate ETF (ongoing charge of 0.40%). This fund uses a combination of minimum variance weighting and a fixed-income component in an attempt to better reflect the inflation hedging, volatility, and rate-sensitivity characteristics of the underlying real estate.

Although an interesting investment, we would recommend that potential investors undertake the appropriate due diligence when considering this fund because of the complexity of its exposure.

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