Xtrackers FTSE Developed Eurp RE ETF 1C GBP (LSE:XDER) - ETF price


ETF Report

Xtrackers FTSE Developed Europe Real Estate UCITS ETF 1C (GBP) XDER

AnalystReport

PortfolioConstruction

The FTSE EPRA/NAREIT Developed Europe Index is a free-float-adjusted, market-cap-weighted index that offers exposure to around 100 of the largest REITs and real estate holding and development companies listed in Europe. To be eligible for inclusion at rebalancing, at least 75% of a company’s EBITDA in the previous financial year should have come from relevant real estate activities. In addition, all components are screened for FTSE’s requirements on investability and liquidity. The constituents of the index are reviewed quarterly in March, June, September, and December. Aside from a tilt towards UK stocks, the index is well representative of the European indirect property Morningstar Category. At the time of rating, the index is weighted towards the UK (25%), Germany (25%), and France (20%). Diversified property REITs (31%), followed by Residential REITs (25%) and Retail REITs (16%). The index has around 108 components. The largest constituents are Vonovia (9%), Unibail-Rodamco (9%), and Deutsche Wohnen (6%).

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Fees

The fund has an ongoing charge of 0.33%, making it significantly cheaper than the median fund in the European indirect property category and one of the cheapest ETFs available. It is worth noting that the fund lags its benchmark index by less than its ongoing charge, and over certain time periods the fund actually outperforms its index. This can be mainly explained by the differences in withholding tax treatment between the methodology of the index and that of the fund. 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

The fund uses full physical replication of the FTSE EPRA/NAREIT Developed Europe Index. This means that the fund holds all the index securities in the same weightings stipulated by the index. The fund uses futures for cash management purposes. This is standard practice and helps limit tracking error. The fund engages in securities lending to help improve tracking performance. Gross lending revenue is split 70/30 between the fund and Deutsche Bank AG, which serves as lending agent. Deutsche Bank covers all operational costs associated with the securities-lending transactions. The company website reveals that the fund received less than 0.01% from securities lending in the trailing year to May 2019. As a general rule, no more than 50% of the fund's assets can be lent out at any given time. Although this activity can help to fully offset holding costs, it exposes investors to an element of counterparty risk. To protect the fund, borrowers are requested to post collateral greater than the loan value. The collateral basket has been predominately composed of high-grade (Aaa or Aa2) euro-denominated government debt. As an additional protection measure, Deutsche Bank provides borrower default indemnification; that is, in the event of a borrower insolvency or default, the bank will indemnify the fund for any shortfall between the proceeds from collateral liquidation and the market value of the securities on loan. Xtrackers is nearing the end of a transitionary period in which it has made strides towards becoming a stand-alone asset manager. This process has involved severing links with Deutsche Bank’s investment banking arm, in-housing the management of all its ETFs, and converting a large number of products to physical from synthetic replication. The recent IPO and rebranding exercise are perhaps the most visible result of this shift. The process, which has been managed smoothly, has required a significant investment in both personnel and infrastructure. Although the management team remains relatively new as a unit, the calibre of recruits has been high, and the systems that have been implemented represent an upgrade on those they have replaced.

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Suitability

Because of its low-cost and broad representation of the sector, this fund is a reliable option for investors seeking exposure to the European REITs and listed real estate equity market. The fund retains a Morningstar Analyst Rating of Bronze.

The fund tracks the FTSE EPRA/NAREIT Developed Europe Real Estate index, which is--aside from an overweight to the UK--largely representative of the available opportunity set in terms of size, sector, and geography.

The fund’s ongoing charge of 0.33% makes it much cheaper than the European indirect property Morningstar Category average--the lower fee makes it one of the cheapest exchange-traded funds available.

This considerable cost advantage hasn’t translated into clearly superior risk-adjusted performance relative to category peers, both active and passive, over the past three and five years. This uninspiring performance has been driven by an overweight to the UK, which has lagged since the Brexit referendum. However, over longer time horizons--for example since its inception in 2010--the fund has outperformed the average peer on a risk-adjusted basis.

We also expect that the fee cut implemented in March 2017 to 0.33% from 0.40% will boost returns looking forward.

Offering comprehensive access to the broad European--inclusive of the UK--REITs and listed property equity market for a low fee, the fund exhibits all the hallmarks of a top tracker. This is a sector in which active managers have struggled to distinguish themselves. For these reasons, we have awarded this fund a Morningstar Analyst Rating of Bronze.

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Fundamental View

This ETF offers indirect exposure to the largest European-listed retail, industrial & office, real estate holding & 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 region-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 exposure to European listed infrastructure through ETFs have several options. The most popular alternative as measured by assets under management is the iShares European Property Yield ETF. Because of its exclusion of the UK, it is most suitable for use tactically to complement existing UK holdings, rather than as a stand-alone investment in European listed real estate. The fund has an ongoing charge of 0.40%. Also excluding the UK, the SPDR FTSE EPRA Europe ex UK Real Estate ETF comes with a lower ongoing charge of 0.30%.

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