CNBC – Aug 2016

Real estate gains new market prominence starting Thursday

The S&P Dow Jones Indices and MSCI will give real estate its own unique class, separating it from the gang within the financials sector. The parting of ways comes as real estate as a sector has outperformed the S&P 500 with S&P’s REIT industry index up 24 percent annually since the bull market began in 2009, versus 18 percent for the benchmark.

The new classification will include all real estate investment trusts (REITs) with the exception of mortgage REITs, which will remain classified under financials.


Man reviewing financial affairs using investment statement

Rafe Swan | Getty Images
Man reviewing financial affairs using investment statement

Being a standalone category is a double-edged sword. The new classification will attract passive investors looking to track a new major sector of the market and may bring in new money from active investors who may not have been aware of the sector’s strong performance. But memories of the real estate crash and the mortgage crisis in 2008 may be enough to deter some investors, rightly or wrongly, who still see real estate as risky.

“Reclassifying REITs and real estate operating companies (REOCs) into a standalone sector, apart from providing a more accurate description of the companies themselves, will likely raise the profile of real estate fundamentals overall,” said Jamie Anderson, managing partner of Tierra Funds, which offers the Tierra XP Latin America Real Estate ETF.

REITs have outperformed the broader markets because they are a strong dividend play in a low-yield environment. REITs are required to pay at least 90 percent taxable income annually in the form of shareholder dividends; real estate stocks today provide 7 percent earnings growth and 3-plus percent dividend yield. In addition, the fundamentals of the commercial real estate market, especially the industrial, apartment and office sectors, have seen a strong recovery since the recession. Their classification under financials may not have highlighted that strength.

Technically, what is happening is that real estate will be its own category in something called the Global Industry Classification Standard structure, a guidepost of sorts for the global financial community. This marks the first time a new sector has been created under the GICS structure since it began in 1999.

“This is the first significant structural change to GICS sectors since its inception and reflects the position of real estate as a distinct asset class and a foundational building block of a modern portfolio, rather than an alternative,” said Remy Briand, managing director and global head of research at MSCI. “GICS was developed as a means of standardization that would keep up with the evolving investment landscape.”

The change was first announced last spring. “The creation of an eleventh sector recognizes the growing importance of real estate in the world’s equity markets,” said David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices, in the announcement at the time. “The decision to add a real estate sector was based on extensive comments from investors and analysts as well as in-depth analysis and discussions between S&P Dow Jones Indices and MSCI.”

Of course, any change of this magnitude creates anxiety. “Unanticipated consequences are that people that are looking at the current financial index [are seeing] those returns have been enhanced by real estate,” noted Alexander Goldfarb, managing director and senior REIT analyst at Sandler O’Neill. “REITs will come out of financials, so the performance of the financial index can lose what had been a strong tailwind.”

CNNMoney – Jul 2016

‘Stampede’ of cash rushing into emerging markets

Wall Street Journal – Jun 2016

A New ETF Bets on Brazil’s Real Estate

Fund is off to a promising start, up almost 12% this year

The real-estate market in Brazil has been under pressure from the recession there.
The real-estate market in Brazil has been under pressure from the recession there. Photo: iStockphoto/Getty Images

For those who think there is money to be made in Latin American real estate, the early returns of a new exchange-traded fund are promising.

Tierra Funds launched the Tierra XP Latin America Real Estate ETF (LARE) in December. The fund tracks the Solactive Latin American Real Estate Index, which comprises 56 stocks listed in the region, primarily in Brazil and Mexico.

The fund is up almost 12% since the start of the year, and has net assets of just under $2.9 million. About half its investments are in real-estate investment trusts, which have holdings in income-producing property like malls and industrial parks, and are required to pay out a periodic dividend. The remainder is concentrated in real-estate operating companies, which are similar to REITs, though they aren’t required to pay a dividend and can invest in a broader range of companies. The fund also invests in an array of other real-estate-focused companies, from construction firms and home builders to related services.

The real-estate market in Brazil has been under pressure due to the recession there, says Jamie Anderson, managing principal of Tierra Funds. Still, he is optimistic, despite the country’s economic travails and the political turmoil surrounding the impeachment of President Dilma Rousseff. Mr. Anderson figures that the economy could turn a corner this year, particularly if the political situation stabilizes, and that there could well be a cut in interest rates, which would benefit the property market.

“Brazil is going to be an unpredictable, challenging environment, but we believe that the broader trend is up, or at least we’re at a point where we’re going to consolidate for a while,” he says.

The fund’s second major focus is Mexico, which has a “very vibrant commercial real-estate industry,” Mr. Anderson says. However, the real-estate market there is similar to the U.S., he says: It’s much more stable than Brazil, “but the returns are going to be lower.” Elsewhere, he sees opportunities in the Andean region, particularly Peru and Colombia.

Mr. Cowan is a writer in London. He can be reached at

ETFdb – May 2016

Exclusive Look Into Latin American Real Estate: Q&A with the Managing Principal of Tierra Funds

May 24, 2016


Real estate is an asset class that can be used to diversify your portfolio. A great way to gain exposure to real estate investments is through ETFs. Tierra Funds recently launched a new ETF that tracks the Latin American real estate market. Although, investing in that region may be riskier than other developed nations, Jamie Anderson, the Managing Principal of Tierra Funds is bullish on the idea that the Latin American real estate market is attractive at this time. This is especially evident by the fund’s current YTDperformance of over 20%. Below are Mr. Anderson’s responses to important questions on this subject. (ETFdb): Tierra Funds, which is part of ETF Managers Group, recently launched its first ETF. What was the motivation behind the launch of the Tierra XP Latin America Real Estate ETF (LARE ) in December 2015?

Jamie Anderson (J.A.): The Tierra XP Latin America Real Estate ETF (LARE) is the first listed product of its kind to offer sector specific access to the growing real estate market in the region. My partners and I have been working in Latin America since the early 1990s and have been through multiple economic cycles. Last year, we looked at the relative value of real estate assets and concluded that prices in Latin America were approaching an extremely oversold level. Deciding to list in December 2015 was, frankly, something we did with a pretty high confidence level since, in our view, income producing real estate trading at 0.60x tangible book value presented a very compelling opportunity for the long term investor.

The LARE ETF offers the investor exposure to local equities from Mexico, Brazil, Argentina and Chile through a balanced, diversified methodology, focused on income and growth potential. Over 80% of the LARE ETF components are unavailable in any competing product which we think is a major advantage for the investor.

In addition to attractive income and growth potential, the LARE ETF offers low volatility and low correlation to major benchmarks, such as the broad MSCI Emerging Markets Index and the S&P 500. What distinguishes the LARE ETF is our multi-factor approach to component selection that ranks dividend yield, market capitalization and liquidity against the population set. In our view, real estate is unique in that it benefits from both global and local capital demand for income and perceived relative safety. Most importantly, favorable long term demographics in the region suggest that it’s still early to mid-cycle for many property types, especially housing – which matters because real estate investing on the back of an expanding market is a great way to potentially capture appreciation and dividend growth.

ETFdb: The Latin America Real Estate ETF (LARE ) has done really well YTD, up over 20%. Could you tell us the major reasons for this?

J.A.: Thank you, we’re really excited about the performance so far. LARE is actually up 22.3% year to date as of 5/5/16 and we’ve made two dividend distributions with a SEC 30 Day yield of just over 4% according to Morningstar data. The two major catalysts have been the Brazil rebound and the global shift back into emerging markets.

Even though Brazil makes up about 45% of the weights, LARE net asset value actually exhibits less than half the volatility versus the Brazil benchmark. I’d also point out that since inception of 12/3/15, LARE NAV is only 51% correlated to the S&P500 and 72% correlated to the broad MSCI Emerging Markets Index. So, there’s something unique about Latin America real estate that tends to zig when other assets are zagging, and, again, we think part of that has to do with both the kind of capital that invests in real estate but also the nature of real estate itself having bond-like characteristics. There’s a saying from my early days in Mexico that real estate is slow to go down in a recession but first to go up when investors sniff a recovery around the corner and that appears to be what’s happening in Latin America right now.

We are asked frequently if the rally can sustain itself? Our view is yes, but we feel it’s increasingly necessary to be tactically selective and to lower one’s risk profile. The LARE ETF is a great way to achieve these goals. A large part of the rally this year has been driven by currency appreciation. In fact, the Brazil stock market index (IBOV) is still trading at 11x trailing earnings, so there’s definitely appreciation potential there. The question is will it be market wide or more sector focused? While we are bullish on Brazil overall, we view a tactical shift into real estate as an ideal way to maintain exposure, get paid to wait for broader growth to return and reduce one’s risk profile all at the same time.

Lastly, since inception, LARE NAV generated 41% alpha as of 5/5/16 versus 36% for Brazil, -3% for Mexico and -6% for the MSCI Emerging Markets Index. What this means is when you risk adjust taking things like volatility and beta into consideration, LARE NAV has delivered better quality returns versus the major regional and global alternative products.

ETFdb: What has been the trend in the Latin American real estate market in the last few years?

J.A.: Broadly speaking, Mexico and Chile have seen steady appreciation of real estate values on the back of stable economic conditions marked by low inflation and growing consumer bases. Argentina only recently re-emerged onto the global scene and we are very optimistic about a resumption of growth there, but it will take some time. Brazil, as many are aware, is in its third year of recession but, we believe the country is on track to resume growth later this year or early 2017.

Mexico is really just chugging along well. Leading into the 2009 global correction, Mexico was clearly overbuilding in the housing and commercial retail segments but excess inventory was quickly absorbed by the REITs, fueled by local capital. We are very optimistic about Mexico and foresee more REIT IPOs as well as the first MLPs which are set to debut later this year.

Brazil’s real estate development cycle was very much interrupted by the recession, but certain property segments, namely industrial and low/middle income housing remain quite strong. Office development and commercial retail haven’t seen dramatic pullbacks in rents and there are signs that consumer spending is strengthening after a rather dreary 2015. That said, given the severity of the recession, real estate has remained surprisingly resilient. As we get closer to the second half of 2016, we expect the central bank to begin focusing on cutting interest rates. When that happens, real estate development is going to be a direct beneficiary.

ETFdb: Which regions of Latin America are expected to see real estate price increases over the next five years? And does LARE have exposure to those regions?

J.A.: Our experience over the last 20 years is that real estate on average appreciates 10% to 15% per year in USD. Granted, there have been rocky periods but over the long haul, real estate values appreciate nicely. Mexico and Brazil are in unique positions within the region as the secondary markets for real estate are now the major sources of financing. This wasn’t the case ten years ago. For the long term investor, this is an incredible opportunity to invest alongside local institutional capital and retain liquidity and the convenience of the public markets.

Combined, Mexico and Brazil represent about 95% of the LARE ETF’s weights. It is important to realize that for a USD investor, both Brazil and Mexico saw their currencies decline by about 40%. So, you’ve got a heck of a currency tailwind behind you in addition to assets being relatively cheap in nominal terms. That said, we’ve seen Mexico REITs getting consistent 3% to 5% rental increases across the board and the combination of local pension capital has only served to put a floor on cap rates. In fact, Mexico has become a very difficult environment for global private equity because local pension demand for real estate basically outbids global capital for assets. This was not the case 20 years ago when global private equity was the only source of financing.

Brazil is in a different situation where we are coming off of a base where nominal asset prices remain well below their long run historical values due to very high interest rates and recession. Brazil, for the USDinvestor, offers a compelling opportunity to invest in cheap assets in nominal terms but, again, with a very favorable currency tailwind. We think it’s a no brainer for somebody with a two to three year time horizon. One thing to keep in mind about Brazil is it’s a $1.5 trillion economy with a very robust consumer market. If the government follows through on fiscal reforms, which is looking like a reality, unleashing the consumer in Brazil will be a powerful engine of growth – and real estate will be at the center of that.

I’d like to mention Peru and Colombia which have seen a decent amount of private equity investment over the last few years. LARE does not have any components from either country yet but we are excited at the prospect of being able to add them when possible.

ETFdb: What exposure does the LARE ETF have to Brazil’s political and economic uncertainty?

J.A.: Brazil’s political climate has been a major focal point this year. As many already know, the Senate just formally approved that impeachment charges be brought against President Rousseff, which means that she will have to step down for up to 180 days, during which time there will be a formal trial. However, the fact that over 2/3 of the Senate approved of the impeachment measure, Rousseff is likely to resign from office since that majority would be sufficient to convict her. Vice President Temer is expected to assume the Presidency and many expect swift changes, including at the Finance Ministry and the Central Bank, intended to bring the country fiscal issues under better control. If these changes come to pass, as many believe, Brazil could be on a strong path to growth by early 2017.

Much of the uncertainty has already been priced in. Keep in mind that Brazil sold off pretty hard into February before it became clear that Rousseff’s government coalition was set to fall apart. Once that reality set in, investors came back with a fury. All of that said, we don’t expect smooth sailing. Brazil has a long way to go and volatility will likely remain elevated which is another reason why we feel strongly about LAREas a proxy for Brazil exposure. The Brazil benchmark has YTD realized volatility of almost 49%. The LAREETF’s realized volatility over the same period is 24%. We mention this because, an investor can have exposure to Brazil without the Brazil volatility which we think is a very compelling proposition. Lastly, the LARE ETF’s dividend yield is about 100 bps better than the leading Brazil ETF.

ETFdb: There seems to be a lot of risk associated with investing in Latin American countries such as Brazil, Mexico and Chile. As such, what type of investor should hold LARE?

J.A.: Great question! If you haven’t noticed we talk a lot about volatility. We are big believers in achieving exposure through diversification and low volatility. It doesn’t hurt to have low correlation too. Volatility is a really great metric to evaluate investment options. While not a predictor of returns, low volatility in combination with low correlation can be a very powerful portfolio diversifier. LARE NAV exhibits low volatility versus the Top Ten Latin America products available and it is regionally diversified, so if there are problems in one country, the investor isn’t putting all of their eggs in that basket. Conversely, as we’ve seen with Mexico underperforming this year, the investor can capture some of the upside in other places like Brazil without taking on the Brazil volatility.

We believe the LARE ETF provides an advantage to the income investor but also offers the growth potential of emerging markets. We see the LARE ETF as a formidable proxy for Latin America exposure overall but also as an addition to a broad emerging markets allocation. Specifically, the LARE ETF in combination with a broad emerging market product or a broad emerging market fixed income product, could form the basis for attractive alpha generation and provide a boost to the blended income potential.

The Bottom Line

The Latin American real estate market might be undervalued, as Jamie Anderson stated. This is due to oversold conditions and low PE ratios in countries such as Brazil, Argentina, Mexico, and Chile. The Tierra XP Latin America Real Estate ETF (LARE ) is for investors seeking to increase diversification in their portfolio by investing in Latin America with relatively lower volatility when compared to other Latin American investments.

The ETFstore – Apr 2016

Tierra Funds’ Jamie Anderson Spotlights Latin America REIT ETF (LARE)
April 12th, 2016 by ETF Store Staff 

Jamie Anderson, Managing Principal at Tierra Funds, spotlights the Tierra XP Latin America Real Estate ETF (LARE).


You can listen to our interview with Jamie Anderson by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: The ETF we’re spotlighting this week is the Tierra XP Latin America Real Estate ETF. The ticker symbol on that is L-A-R-E, and joining us via phone from just outside Philadelphia to discuss this ETF is Jamie Anderson, managing principle at Tierra Funds. Jamie, a pleasure to have you with us today.

Jamie Anderson: Thanks a lot guys. It’s great to be here.

Nate Geraci: Jamie, this is the first ETF to offer access to REITs and real estate operating companies in Latin America, and before we get into the details of this ETF, for our listeners who may be unfamiliar with REITs and real estate operating companies, can you explain what these are? What types of companies are these?

Jamie Anderson: Sure, absolutely. Basically the distinction between a real estate investment trust, R-E-I-T or REITs as you said, and a real estate operating company is a REIT by law must distribute substantially all of its pretax income to the investor. There’s some other requirements, but the major requirement is that REITs can’t engage in risky activities. That would be something along the lines of development or construction, etc. It can really only own what we call in the industry income producing stabilized properties. A good example would be a leased office building or a shopping mall that’s stabilized, or an industrial park that is leased and stabilized. In effect, a REIT is really a standard C-corp or corporation that checks the box pursuant to IRS regulations in satisfaction of the requirement to pass through this pretax income in the form of a dividend to the investor. Investors like REITs because they are generally not taking the kind of risk that you would associate with let’s say a home builder, like Lennar, or a construction company, etc. In effect, they’re designed to pass the maximum amount of pretax income to the investor, and investors like it for the income as well as the growth potential.

On the REOC side, the R-E-O-C, real estate operating company, we’re really talking about companies that engage in a broad range of real estate activities, which may include development, but it can also be a REIT-like company, like Brookfield for example or Prologis, that actually owns a lot of stabilized real estate property, be it industrial or shopping malls, but they happen to also engage in development of these real estate assets. In general, we distinguish between REITs and real estate operating companies simply to convey to the investor that with a REIT, you are getting a cleaner exposure to the income that stabilized commercial real estate offers.

Nate Geraci: Okay, so the ETF is the Tierra XP Latin America Real Estate ETF. Again, this holds REITs and real estate operating companies in several Latin American countries. Take us from there. What does the breakdown of companies looks like in this ETF? How are those companies selected? What countries are represented in the ETF?

Jamie Anderson: This is a regional product. It’s the first of its kind. We wanted to capture the broad asset class in the Latin America region for a number of different reasons, which we can get into later. The product has 56 components. There’s 56 equities. The breakdown is approximately 45% Brazil, 48% Mexico, 3% Chile, and about 1% Argentina. We expect the geographic coverage to increase as more real estate equities come to market in Peru and Columbia for example. The breakdown itself between the 56 components is about half REITs and then half non-REIT or real estate operating companies. Our selection process is actually pretty thoughtful. We’re actually real estate private equity guys who started working in the Latin America region back in the early ’90s, and what we wanted to achieve with this product was to kind of take an institutional mindset to investing in real estate and make that available to not just institutional investors through the ETF wrapper, but also to individual investors.

Our methodology is not simply market cap weighted. What we found is that if you take a market cap weighted approach, you end up with a product not dissimilar from a lot of emerging market ETF products that is heavily weighted towards a few components. We wanted to capture a balanced exposure to the region, so what we do is we take the multifactor methodology and we take market cap, dividend yield, and liquidity in the underlying shares, and we rank each of the components against the population set and then re-rank the entire population group. What we end up with is a product that is very disperse. I think the latest weights are about, the top 20 components, which is somewhere around 39% of the total components, the total 56 components, only constitute something like 56 or 57% of the weight, which is very unique in the space in terms of emerging market ETFs. You normally will find the top 10% of the components will constitute something like 50% of the weight. In other words, if you buy that product, you’re very heavily weighted towards a few of the components. While you might have exposure to smaller components, it’s really de minimis at the end of the day. The LARE, L-A-R-E is the ticker, really seeks to broaden, to diversify.

I’ll give you a great example of why this is fantastic. Yesterday there’s a Mexican home builder called GEOB, G-E-O-B is the ticker, and for some odd reason, this company shot up 67% yesterday on very much above average trading activity. Now, that’s great when it’s going up, right? You pat yourself on the back. You go out to dinner, but that kind of movement also means that you’ve got the potential for substantial downside. In the LARE, GEOB is about a 38 basis point weighting, 0.38%, so while you’ve got exposure, it’s not the kind of exposure that’s going to kill you if the stock sells off hard. Yesterday for example, you got to capture some of that GEOB movement. It actually added something like 30 basis points to the daily move on the LARE itself in total. Just to circle back really quickly, the 50% weighing of REITs in the portfolio, and that’s broken down about 50-50 between REITs in Mexico and REITs in Brazil, constitute something around 75% of the total dividend yield on the product, so right now the index is showing about a 5.2% trailing dividend yield. That’s annualized, and we’re happy to announce that about 4 weeks ago, we actually issued our first dividend, which was approximately 20.9 cents, which works out to a 3% annualized dividend yield current, which we expect to grow actually as more components start issuing dividends through the calendar year.

Jason Lank: Jamie, this is Jason Lank. In terms of exposure, it would appear that Mexico and Brazil are the largest constituents by quite a bit, and I would imagine many of our listeners have been to Mexico either for business or pleasure, but not so many to Brazil. My question is, in a recent discussion you had at, you called Brazil’s economy funky or closed, perhaps with capital controls. Just at a high level, speak to what that means for real estate investors.

Jamie Anderson: Sure. One of the things that we find very attractive about Brazil right now is it’s been severely discounted over the last 3 years, so from a valuation standpoint, it’s really hard to not take a look at real estate assets, and frankly assets in general. So, equities in general are very cheap. Real estate in particular got very cheap. The distinction between real estate investment trusts in Brazil and in Mexico is they’re actually a new product in Mexico. They’re only 5 years old, and the legislation that governs REITs in Mexico is essentially modeled after REIT tax law in the United States. Now that being said, it’s a new industry. You’ve only got 11 listed REITs in Mexico, which we expect to probably double over the next 2 or 3 years, something like that. On the Brazil side, REITs are actually, they’ve been around for 20 years. Brazilians gravitated to the REIT model very early on because Brazil is an investment environment where yield specifically spread over cost of capital is very much paid attention to by Brazilian investors. The REIT instrument in Brazil is legally a closed end fund, so what the investor gets in Brazil is effectively a spread in the form of income rents over the cost of capital.

There’s some other things about the REIT industry in Brazil that are quite interesting. One is for example, REITs by law in Brazil can’t take on debt. You never have to worry about a REIT overleveraging itself, and then secondly, by law real estate contracts are written to include the headline CPI plus a margin in terms of their annual rental increases, so there’s a built-in hedge there with real estate rental income in Brazil that generally over time means that the investor is getting an attractive spread over inflation in Brazil. What we wanted to do by including Brazilian REITs in this was to capture that spread. The real yields in Brazil right now are about 450 basis points, which is unheard of around the world, right? While yes, inflation is high in Brazil, yes, there are some political problems, the country is heading into its third year of working through a recession, the real yields on real estate are quite attractive. For example, back in January, real estate in Brazil got down to about 0.6 times book value on an unlevered basis. I mean, that is severely discounted. You mentioned capital controls. Brazil is a country that operates with capital controls, meaning that the currency doesn’t free float. For example, you couldn’t buy the Brazilian Real outside of normal trading hours. It is very hard for individuals to, not very hard, but it’s challenging for individuals to freely, Brazilian nationals, for example, to send money abroad. Actually, it’s easier for them to receive money abroad, but it’s harder for them to send money abroad. What that means to the investor is if you invest via an instrument like the LARE, the L-A-R-E, or other Latin America ETFs, you’re already set up to receive your income freely. We’ve already gone through the process of setting up the necessary vehicles, for example the local custody accounts and the local custodian and all that stuff, to allow for the free transmission of dividends that are paid locally, as well as buying and selling of the assets.

Nate Geraci: Again, we’re visiting with Jamie Anderson, managing principle at Tierra Funds. We’re spotlighting the Tierra XP Latin America Real Estate ETF, ticker L-A-R-E. Jamie, we have a few minutes left. Where does this ETF fit in an investor’s portfolio? We’ve certainly highlighted broad U.S. REIT ETFs on the program before, but how should investors view this Latin America REIT ETF in the context of their overall portfolio?

Jamie Anderson: It’s a great complement to an emerging markets allocation for a couple of different reasons. One is it fits right in with an income objective. We expect the dividend yield to grow to approximately 5% per year, and there’s growth potential. Secondly, the LARE is highly unique because its realized volatility is right on par with the global MSCI emerging markets benchmark, which you can buy through the EEM ETF. That volatility being on par with the EEM is quite attractive because when you drill down and you look at the Latin America region itself in terms of ETF alternatives, the LARE has the lowest volatility with the exception of I think two ETFs. One is Mexico and the other is Peru, oh excuse me, Chile. If you want broad exposure through the IOF, you’re going to have a lot more volatility. If you want exposure specifically to Brazil through the ERBZ, you’re going to have more than 2 times the volatility, and again, just to circle back, while that’s great when things are going up, you have to be prepared for significant drawdowns when asset prices do sell off a little bit. We think the volatility associated with the LARE is very unique, highly complementary to anybody who wants emerging market exposure, and lastly I will say, my experience in the region in 25 years. The first rule is you want to buy assets when they’re cheap. The second rule is you want to pay a lot of attention to volatility because when things don’t work out, that’s when you get burnt.

Nate Geraci: Well, Jamie, we’ll have to leave it there. Great Spotlight. We certainly appreciate you joining us today.

Jamie Anderson: I really appreciate it guys. Have a great day.

Nate Geraci: That was Jamie Anderson, managing principle at Tierra Funds. The ETF is the Tierra XP Latin America Real Estate ETF, ticker L-A-R-E. You can learn more about this ETF by visiting That’s – Mar 2016

One of the newest ETFs to come to market offers first-of-its-kind access to Latin America’s real estate market. The Tierra XP Latin America Real Estate ETF (LARE) tracks an index of Latin American companies that generate the majority of their revenues from real-estate-related ventures. The fund’s underlying index covers four areas: REITs, developers, property owners/operators and companies that provide services to real estate companies and infrastructure developments.

Jamie Anderson, managing partner at Tierra Funds, discusses how LARE works and why adding this type of strategy to your portfolio makes sense. Tell me a little bit about the portfolio. What do investors own with LARE? 

Jamie Anderson: This is the first U.S.-listed ETF product that exclusively focuses on the Latin America real estate asset class. It has 62 components. Approximately 55% of the weights are REIT equities or REIT-comparable equities. The balance are real estate operating companies—residential home developers, service providers, commercial real estate owner operators, etc. We have a fairly robust, diverse set of equities that are represented in this product.

The reference index is the Solactive Latin America Real Estate Index, which we actually created for this product specifically.

One of the goals we set out to achieve was to provide institutional and retail access to the asset class without having to go into illiquid, nontraded, private-equity-type instruments, which, up until this point, was really the only way you were going to get diversified access. Somebody can single-stock-pick with the emergence of listed REITs, especially in Mexico, but they’ll find it’s a challenge to find lower correlation, lower beta and lower volatility without sacrificing yield.

It’s a multifactor approach that takes liquidity, dividend yields and market cap into consideration. It ranks the individual components against the population set and then reranks the entire population. What we end up with is a balance between income and growth.

The index currently has a trailing dividend yield of a little north of 6.5%. I feel really great being able to say the performance year-to-date has been nothing short of phenomenal. Now, we don’t have double-digit returns, but the current net asset value on the product, on a price-return basis, is up 1% year-to-date. The total return is up 2.2%.

And volatility is running roughly comparable to Mexico over the medium term, but it’s about half the volatility of Brazil. To put that into context, Brazil makes up 58% of the weight in the index. So to be running at half the volatility Brazil has shown over the last six-month period—but especially on the year-to-date basis—is a phenomenal advantage for an investor in the product. From a country exposure, is this really a Brazil/Mexico fund? 

Anderson: It’s about 40% Mexico, 58% Brazil and then we have Chile in there. I will say there’s a very strong likelihood Argentina will be included at some point soon. If you look at a chart, the iShares MSCI Mexico Capped (EWW | B-97) and the iShares MSCI Brazil Capped (EWZ | B-96) are down 15% and 37%, respectively, over the 12-month period. Why would now be a good time to launch this product? Does it really speak to just how uncorrelated these REITs are to the broad equity market in these countries? 

Anderson: I think that’s multilayered. The big picture is there’s a clear shift in assets going into emerging markets now. We hit a bottom in the broad EM space back in September/October 2015. Since that period, emerging market currencies have either been range-bound or have been actually appreciating. And that’s on the back of a 2 ½-year period where the trade-weighted U.S. dollar appreciated almost 35%.

The weak-EM/strong-U.S.-dollar/preference-for-development market theme is not new. We’re really into our third year here. But investors are sniffing out a bottoming process and they’re allocating capital.

On a more granular LARE-specific basis, yes, real estate has lower correlations to the local benchmarks, but also to the broader benchmarks. For example, between September 2015 through current day, LARE is 49% correlated to the S&P, and it’s 65% correlated to the iShares MSCI Emerging Markets (EEM | B-100), which is a good, broad benchmark.

Brazil equities, meanwhile are 62% correlated to the S&P and 76% correlated to EEM. Mexico is 79% correlated to the S&P, and 88% correlated to EEM. So you can get lower beta, lower vol, but you’re also getting lower correlation.

Lastly, one of the keys to surviving in the EM space is really to buy assets when they’re cheap. And that’s where we’re at now, especially with real estate. I could run through some big-picture P/E and price-to-sale metrics, but the bottom line is that LARE is cheaper than Brazil, substantially cheaper than Mexico and about 15% cheaper than the broad EEM.

Drilling further into the specific opportunities that are represented by LARE in the real estate segment, we think REITs overall—especially in Mexico—represent a tremendous opportunity. They’re growing revenues year-on-year. They’re in expansion mode. They’re acquiring. They’re well capitalized. They have a very strong investor base driven by the local pension market. Contrast that with developed-market REITs—which are in effect either selling assets or taking on debt to pay dividends. What’s driving this renaissance in REITs in Latin America? Is it a demographic trend?
 It’s demographics, and it’s just the slow march of emerging markets in general. It’s all that stuff. In Mexico, there’s been a shift in consumerism that’s just off the charts. There’s a bona fide middle class and a bona fide upper middle class that wasn’t there in the 1990s, and that benefits real estate as well.

Brazil’s funky because it’s a closed economy. At the end of the day, it’s got capital controls. It’s not an easy place to do business. That said, Brazil is a very strong consumer economy. And when things do start to settle down, the power of the Brazilian consumer is quite strong.

It’s very constructive on the real estate front because on the residential side; you’ve got a very strong cultural preference for real estate as a vehicle for long-term savings. And secondly, you’ve got a very entrenched public subsidy program. So this would be kind of like a combination between Fannie Mae and the FHA. So LARE is basically an income ETF, a growth ETF and a lower-volatility ETF relative to emerging markets. Where does it fit in a portfolio? 

Anderson: We’re obviously a new product. We have $2.5 million in AUM. If we set that factor aside right now, I would argue this is not just a complementary ETF, but a potential proxy for emerging markets investment—certainly a potential proxy for Latin America exposure. But it’s clearly a potential complement for somebody who owns one of the big products in the region, or the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB | B-58).

I think complementing real estate with a strong income component in EMB is a really nice way to gain that EM exposure and maintain predictable income—and in fact, enhance that predictable income substantially. But it can also keep the volatility down. Adding LARE would also add growth potential, not just income. What about the currency exposure here? These are locally listed REITs and securities. Should investors worry about the currency factor in this strategy? 

Anderson: No. 1, it would be impractical to try to hedge Brazil, and also Mexico; it would just be prohibitively expensive. But I think, more importantly, we’ve seen the real carnage now. We’re in the third year of this. You wanted to hedge two or three years ago. You don’t necessarily want to hedge now.

We know that a strong dollar is a major theme for the Fed, and for governments around the world. Nobody wants the dollar to get stronger. And frankly, we’re seeing some pretty good indications that global trade—if not already stabilized—is starting to grow again.

The notion that you need to go out and hedge against a decline against the U.S. dollar is probably not a smart money move now. Because what we’ve seen over the last two months is that the strong dollar trade has been exceptionally crowded and it hasn’t been panning out. What is the biggest risk with this strategy? What could go really south here? 

Anderson: Apart from global macro risk, if the process of uncovering corruption in Brazil somehow started to lose steam, and Dilma’s favorability started to climb dramatically—neither of which I see—that would be a risk.

All I see is indication that this thing is marching forward, and it’s a very constructive process for Brazil. If something changed there, I’d be concerned. Brazil needs to have this political purge. And they’re having it.

On the Mexico front, I would watch for any indication that inflation is starting to creep up consistently above expectations, which we haven’t seen. What we’ve seen is a little bit of CPI overheating, and the Mexican central bank responded very rapidly. But inflation in Mexico, given the strength of the consumer, is something to watch.