One question dividend investors may have is whether it is better to purchase a Singapore REIT Exchange Traded Fund (ETF) instead of a portfolio of Singapore REITs counters.
This article will compare the Lion Phillip S-REIT ETF performance against an equal-weighted portfolio of S-REITs found in the STI over the last three years.
A brief introduction to the Lion Phillip S-REIT ETF
The Lion Phillip S-REIT ETF (Ticker: CLR) is one of the fastest ways for a rookie investor to invest in a portfolio of real estate investment trusts.
With one purchase of this ETF from the stock exchange, you will be able to own 27 REITs sold on the SGX and will be able to collect dividend payouts twice a year – once in February and once more in August.
At the time of writing, Stocks Café has given it a current yield of close to 4%.
The constituents of the ETF comes from the Morningstar Singapore REIT Yield Focus Index.
I took a screenshot from the Morningstar website to observe the weights of the counters:
From this screenshot, we can observe that the weights for the counters are not equal. We can only have a very vague notion that perhaps REITs with larger market capitalizations seem to have a more significant weightage in the overall index.
For most beginning retail investors, an investment into this ETF is enough.
You should expect a diversified portfolio that pays a 4% dividend payout every year at a management fee of 0.5%.
A DIY strategy using just the S-REITS found in the Straits Time Index
As REITs begin to play a more significant role in a local investor’s portfolio, more REITs have found their way into the Straits Times Index.
There are currently seven REITs in the index:
- Capital Integrated Commercial Trust (Ticker:C38U)
- Keppel DC REIT (Ticker:AJBU)
- Ascendas REIT (Ticker:A17U)
- Mapletree Logistics Trust (Ticker:M44U)
- Mapletree Industrial Trust (Ticker:ME8U)
- Mapletree Commercial Trust (Ticker:N2IU)
- Frasers Logistics and Commercial Trust (Ticker:BUOU)
A retail investor can design a simple strategy based on these REITs counters.
To build your DIY REIT portfolio, divide your capital into equal parts and allocate each portion to buy one of the counters listed in the above table. For example, if you have $70,000, you buy $10,000 of C38U, AJBU…. BUOU.
Modern retail investors with access to discount brokerages like Interactive brokers will only incur $2.50 per trade.
And now comes the most important question:
“Should you pick your own REITs or just buy the ETF?”
Here’s how these two strategies had fared historically:
Back-testing the ETF versus the DIY Strategy
We use a Python program to fetch data from Yahoo Finance and simulate the portfolio performance of the ETF versus the DIY strategy over the past three years, which covers the pandemic crash of 2020.
As it turns out, the ETF strategy would produce a return of 4.1%, the downside risk or semi-deviation of the strategy would be 17.76%. The DIY approach would perform much better, with a return of 16.4% and a semi-deviation of 16.8%.
Looking at historical data from Yahoo Finance, the DIY strategy would not just result in higher returns but lower risk for investors.
As a historical back-test, there is no guarantee that the DIY strategy will continue to outperform the REIT ETF in the future.
There will be periods that DIY strategies are expected to underperform. But retail investors can be assured that they will at least save on some management fees.
Conclusion
While exchange-traded funds are an essential item in a busy retail investor’s arsenal and can be a powerful source of diversification, historical back-tests show that some simple strategies employed by DIY investors can sometimes result in significant outperformance benchmarked against ETFs, not just in terms of returns, but a lower downside risk as well.
An investment in knowledge can reap huge rewards.