Latin America Real Estate ETF En Fuego In ‘17
MARCH 13, 2017
The fund is shooting out the lights among all real estate-focused exchange-traded funds in 2016 with a return of 15.81 percent as of March 10, which is double the return of the nearest competitor in the real estate ETF category.
“The two largest markets are Brazil and Mexico,” Anderson says. “Brazil is in a secular bull market. After a two-year recession, we see macro data stabilizing and in some aspects, even improving. Mexico, despite all the election rhetoric, is a critical trade partner. Trump seems to have taken a softer tone regarding Mexico since his inauguration, recognizing the importance of the U.S.-Mexican partnership.”
BofA economist Carlos Capistran echoes that U.S.-Mexico symbiosis. “Faster growth in U.S. industry is positively correlated with faster growth in Mexico’s industry,” Capistran wrote in his February 24th report.
It appears Tierra Funds may be onto something.
According to FocusEconomics, Brazil’s economic data has picked up from rock bottom. Among the positive indicators are falling inflation, which has improved household income and boosted consumer confidence. That trend is expected to continue despite lingering high interest rates. This bodes well for real estate, as do forecasts that current 13 percent rates should drop to 9 percent.
Mexico tells a somewhat different story. Inflation is increasing and real wages are falling. The IMF recently lowered its forecast as tighter financial conditions have reduced confidence, setting up weaker domestic outlook. Nonetheless, contends Anderson, Mexico is about organic growth. “Rates are rising and while inflation has gone up—currently about 4.86 percent—it is historically quite low. Healthy growth and manageable inflation, in our opinion, are not priced in and the two-year long currency sell-off represents a very constructive scenario.”
As its name implies, the Tierra XP Latin America Real Estate ETF invests in REITs and real estate operating companies in Latin America. According to its website, LARE is the “only strategy that tracks a fully diversified, investable basket of real estate equities in the region…[offering] unique access with over 80 percent of its components unavailable in any listed product.” The fund tracks the Solactive Latin America Real Estate Index.
As of year-end 2016, LARE held roughly 60 names split between REITs and operating companies. The majority of its holdings are in Brazil (46.7 percent) and Mexico (45.3 percent) while Chile (5.7 percent) and Argentina (2 percent) make up the remainder.
The fund offers a very diversified portfolio, particularly for emerging markets—the top 20 holdings account for just over half of the total at year’s end, with various property types well represented. It has gained 16 percent since inception 15 months ago. It paid a 12.99 percent dividend yield in 2016, at the high end of global real estate category as listed by ETFdb.com. Although its 0.79 percent expense ratio is high for a passive ETF, its yield that is more than two to three times greater than global and U.S. REITs is compelling.
Latin America real estate tends to have minimal correlation with major indices. For example, the LARE Index run by Tierra Capital Partners is less than 10 percent correlated with the S&P 500 and the FTSE Emerging All Cap Index.
In addition, Latin America real estate has significantly lower volatility than investing in any single country. Anderson notes that reduced volatility and low correlations are a function of Latin America real estate being under-owned. “Local investors prefer this asset,” he says, adding that Latin American real estate isn’t widely held within the overall universe of global real estate.
Local money is an important phenomenon for the region’s growth. Pension capital is taking center stage not only in Mexico and Brazil, but also in countries such as Chile. In prior cycles, private equity swooped in when valuations became attractive. But today’s private equity is too expensive. Pensions are creating competition through public equities, offering long-term capital.
Furthermore, adds Anderson, “Liquidity rebounded along with asset prices in 2016 and is expected to increase further with accelerating asset flows into emerging markets.”
LARE is the only U.S.-listed ETF focused solely on Latin American real estate. But that laser focus might take time to catch on with U.S. investors. The fund has attracted just $2.7 million in assets and has low trading volume. That said, the low fund flows haven’t negatively impacted the fund’s share price performance.
There’s a convincing case for Latin America real estate and fundamentals appear to be strengthening, especially compared to the U.S. real estate market, and that’s reflected in the negative price performance so far this year among equity REIT ETFs focused on the U.S.. Positive market drivers, growing local pension capital and low correlation to broader markets present an interesting investment case the LARE fund.