Readers often ask me: "Willie, what do you think about Singapore REIT ETFs vs Singapore REITs... Would you invest in Singapore REIT ETFs?"
Well, let's break it down.
By the way, I've written about Singapore REIT ETFs here before.
What is a REIT ETF - Why Invest in one?
A REIT ETF is a passive investment fund that's designed to track a specific REIT index - It could be the iEdge S-REIT Leaders REIT Index or the FTSE NAREIT Asia ex-Japan REIT Index.
When you put money into a REIT ETF, the fund automatically buys into a mixed basket of REITs from that index.
The great thing about investing in a REIT ETF is this: You don't have to bother what stocks to invest in. The ETF does the work for you. And buys into a mix of different REITs across retail, office, industrial and healthcare properties and so on.
This way, you take away the need to constantly monitor each individual REITs. It's a lazy way of investing, since it takes away the time needed to pick stocks. More importantly, it's a cheap way to diversify - a big advantage for many time-strapped investors.
Why I'm not buy Singapore REIT ETFs
I agree, a REIT ETF is a safe and cheap way to invest and has served investors very, very well.
However, a REIT ETF has a big problem. I'll explain. As the index grows in value, the REIT ETF automatically buys more of the largest stocks in the index - regardless whether these stocks are overpriced. This is dangerous.
For example, big REITs like CapitaLand or Mapletree may become overvalued over time. Yet, the REIT ETF continues to buy more of them because they make up a large portion of the index. It doesn't care.
You see, as shares of these REITs go up, their weighting within the ETF goes up. This forces the passive fund to buy more. This drives prices higher.
In other words, you're essentially paying a premium for a basket of Singapore REITs.
In a way, you lose control of the price you pay and the best dividend yield you ultimately get.
This brings me to my next point…
The low dividend yield problem
Here's another thing: Today, Singapore REIT ETFs yield around 4-5% dividend yield. At first glance, this doesn't sound too bad.
Now, when you account for the fund's management fees, which is around 0.5-1.0%, the effective yield drops.
Put it this way, you can actually pick individual Singapore REIT stocks that offer yields of 5-6% today. And you don't pay for fees.
In my view, if your goal is to generate substantial passive dividend income, I'd rather spend some time picking Singapore REIT stocks.
On one hand, you can actively pick Singapore REITs that fit your dividend yield target. And avoid overpriced REITs.
On the other hand, you've full control when to buy and sell these Singapore REITs.
What's more, it's hard to control the sectors you're most bullish on. There will be times when sectors outperform or underperform the other.
If you're positive on industrial REITs today, you simply can't buy more industrial REITs within the ETF. That's up to the algorithm.
How to Pick a Good Singapore REIT ETF?
“Willie, I still want to buy Singapore REIT ETFs, how to invest?”
Having said that, if you want to invest in a REIT ETF, here's how I'd pick them:
- Low management fees: Choose an ETF with low management fees. Currently, the lowest fees in Singapore REIT ETFs are the NikkoAM-Straits Trading Asia Ex-Japan REIT ETF and Lion-Phillip S-REIT ETF.
- Good dividend yield (after fees): I'd carefully evaluate the dividend yield after accounting for fees. If the yield makes sense after the fees are deducted, then it might be worth investing.
- Modest fund size: Look for ETFs with larger assets under management (AUM). REIT ETFs with a lower AUM might struggle to attract investor interest. And it could compel the manager to pay less attention to the fund, and even shutting it down.
- Good track record: I'd look for the manager's historical performance at least over the last five years. This tells me the fund's performance is worth investing in. I'd also make sure the tracking error of the fund is as low as possible. This tells me the ETF can closely replicate the REIT index.
My final thoughts
A Singapore REIT ETF, or any passive fund is a simple way to invest without spending too much time picking stocks.
However, it must be both low cost and provide a good diversification. I won't buy a REIT ETF if it fails either of these criteria. REIT ETFs offer a good, diversified exposure to REITs and are useful for the lazy dividend investors. But you are probably compensating this for lower returns, yield and a lack of control over these funds.
I'm not saying REIT ETFs are bad. But if you don't mind a hands-off approach to investing with lower yield, then this might be suitable.
Otherwise, I still prefer to actively pick individual Singapore REITs. REIT ETF has been a great tool for diversification IF, and with a big IF the dividend yield after fees made sense.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
The post Would I buy Singapore REIT ETFs — or pick stocks? appeared first on Dividend Titan.
