GQRE: Sophisticated Real Estate ETF, Not Better Than Simple Ones

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GQRE strategy

FlexShares Global Quality Real Estate Index Fund ETF (NYSEARCA:GQRE) started investing operations on 11/05/2013 and tracks the Northern Trust Global Quality Real Estate Index. It has 170 holdings, a 30-day SEC yield of 3.08%, a distribution yield of 2.89% and a net expense ratio of 0.45%. As described in the prospectus by FlexShares,

The Underlying Index is designed to reflect the performance of a selection of companies that, in aggregate, maximize exposure to quality, value and momentum factors, within a universe of companies operating in the real estate sector.

Constituents of the parent index (Northern Trust Global Real Estate Index) are ranked using a proprietary multi-factor score including quality, value and momentum characteristics. The selection and weighting process is based on this score, and also takes into account industry, country, liquidity and turnover constraints. Mortgage REITs and real estate services companies are excluded. The Underlying Index is reconstituted on a quarterly basis. In the most recent fiscal year, the portfolio turnover rate was 49%.

GQRE portfolio

The fund has about 21% of assets in large companies, 54% in mid-caps and 25% in small and micro-caps. The heaviest country in the portfolio is by far the U.S. (65% of assets), followed by Japan (9.5%). Other countries are below 4%. The next chart plots the top 8 countries, excluding the U.S. for readability.

The heaviest subsectors are retail REITs (22.3%), specialized REITs (20.7%), real estate management and development (14.6%) and residential REITs (13.8%). Other industries are below 8%.

GQRE is much cheaper than the US-only benchmark Vanguard Real Estate ETF (VNQ) based on the price/book ratio. However, it shows an inferior book value growth rate.

	GQRE	VNQ
Price/book	1.43	2.43
Book value growth	+1.56%	+4.25%

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Data: Fidelity

The top 10 issuers, listed in the next table, represent 32.2% of asset value and the largest position weighs 5.2%. All of them are U.S.-based. Risks related to individual companies are moderate, although the top 3 names are over 4%.

Name	Ticker	Weight %
Simon Property Group	SPG	5.22
Digital Realty Trust	DLR	4.64
AvalonBay Communities	AVB	4.15
Equity Residential	EQR	3.31
Prologis	PLD	3.21
American Tower	AMT	2.78
VICI Properties	VICI	2.55
Essex Property Trust	ESS	2.49
Kimco Realty	KIM	2.03
UDR	UDR	1.80

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Performance

Since its inception in 2013, GQRE has significantly underperformed the U.S. benchmark VNQ, which shares more than half of its holdings.

GQRE lags VNQ by 2.2% over the last 12 months:

Distributions have been very irregular over the years, as reported on the chart below. GQRE doesn’t match the needs of investors seeking a steady or growing income stream.

GQRE vs competitors

The next table compares characteristics of GQRE and two of the largest global real estate ETFs (including the U.S.) with over 10 years of track record:

• iShares Global REIT ETF (REET)
• SPDR Dow Jones Global Real Estate ETF (RWO)

	GQRE	REET	RWO
Inception	11/5/2013	7/8/2014	5/7/2008
Expense Ratio	0.45%	0.14%	0.50%
AUM	$354.99M	$4.01B	$1.32B
Avg Daily Volume	$656.17K	$15.40M	$5.39M
Holdings	170	390	252
Top 10	32.20%	36.18%	38.11%
Turnover	49.00%	6.00%	5.00%
Yield TTM	2.46%	2.74%	3.30%
Div. Growth 5 Yr CAGR	-4.42%	-11.36%	-1.73%

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GQRE is the smallest and least liquid of these funds. It has fewer holdings than its peers, but is slightly less concentrated in the top holdings, and has the highest turnover by far. The next chart compares total returns, starting on 7/9/2014 to match all inception dates. GQRE comes in second position, shortly behind REET.

Over the last 12 months, the three funds are almost on par.

Takeaway

FlexShares Global Quality Real Estate Index Fund ETF selects real estate companies based on quality, value and momentum. GQRE implements a global strategy, but 65% of its asset value in the U.S. It shows a more attractive valuation than the U.S. benchmark VNQ, but has lagged it since inception. Despite a sophisticated 3-factor strategy, GQRE has not shown a significant edge over unfiltered global real estate ETFs like REET and RWO. REET looks slightly better than GQRE, with a lower expense ratio and turnover, a higher liquidity and a marginally better historical performance.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.