February 28, 2011

Cohen & Steers ETF Taps Into Anticipated Global Real Estate Boom

Analyst Jason Yablon argues that real estate is a good play as global economy recovers

Exchange traded fund investors looking to profit from the global economic recovery forecast for 2011 are tapping into real estate via a Cohen & Steers ETF that tracks the best large-cap performers within the firm’s own real estate index.

Asset manager Cohen & Steers, a New York-based firm that focuses on real estate securities and global infrastructure, has picked 75 names for its Global Realty Majors ETF (GRI) based on the large-cap companies that are tracked in the Cohen & Steers Global Realty Majors Index.

The global economy is in the beginning stages of recovery, said Jason Yablon, real estate securities analyst at Cohen & Steers, in an interview on Thursday. As a result, he said, now is a good time to invest in the real estate markets because they are starting to heat up during this phase of the business cycle. The ETF allows investors to tap into those markets by focusing on the highest-quality large-cap companies in Cohen & Steers’ commercial real-estate Global Realty Majors Index, he said.

 “We’re at an inflection point in the global economy, and real estate is a good way to play that,” Yablon said. “We formulate what goes into the index, and then the ETF is linked to what we decide goes into the index. We have chosen the top 75 companies globally that are the leading real estate companies in the world.”

Cohen & Steers launched the index at the end of 2006 and followed it with the ETF launch in 2008. The ETF’s market price is down at an annualized 6.71% since the fund’s inception, though one-year total returns as of Jan. 31, 2011, are up 29.99%. Total net assets currently stand at about $41 million, and the expense ratio is 0.55%. Investment advisor is ALPS Advisers Inc.

Anthony Karydakis, senior economist with Commerzbank in New York, agreed with Yablon that the world economy is now in recovery—and this, Karydakis said, has contributed to some “red hot” real estate markets in Asia

“Of course we are in a global economic recovery. I don’t think that reasonable people would question this in the last several months. There have been very

credible and strong signs that the global economy has turned around for some time now,” Karydakis said.

A lot of hot money has flowed into emerging-market economies in the last two years, Karydakis said, which in turn has fueled a rally in real estate, primarily residential but also commercial, in countries such as Singapore and Thailand.

“The reason for that hot money flowing en masse in those economies is that people have been borrowing at ridiculously low short-term rates in the U.S. and eurozone, and it’s a very cheap source of borrowing that international investors and speculators enjoy,” he said. “They take advantage of that to invest in emerging markets in a major way. And that has caused some red-hot real estate markets in some parts of Asia, particularly China, Singapore and Hong Kong.”

Each of the 75 companies in the Global Realty Majors ETF meets minimum size and liquidity requirements, and Cohen & Steers then chooses the companies within the fund and the index based on their quality.

“We know all of these companies well because we’re investing in them on an active basis in our other funds,” Yablon said. “We know the companies’ management teams very well, we’ve visited the properties, we know what’s happening in the local markets, we understand the business model, and we understand the cost of capital and their ability to grow the asset base through acquisitions.”

Different countries have slightly different dynamics, he noted, but Cohen & Steers is seeing the most dramatic growth in London, Hong Kong and some parts of the United States.

Tom Lydon, president of Global Trends Investments and editor and owner of ETFtrends.com, said he met with a group from Cohen & Steers a few weeks ago to learn more about the firm’s ETF. As the ETF market matures, Lydon said, the challenge for companies is to “pick their spots” and focus on a niche.

“Pretty much every index that has been created has an ETF that’s following it,” Lydon said. “What’s going on now is that all the real estate has been taken and populated with ETFs in terms of asset-class sectors and regions. Providers that want to enter the ETF space now have had to be creative.”

This article is part of AdvisorOne's monthlong Special Report at ETFs and their use by advisors. See the previous reporting on ETFs here.

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