5 things to know about the Lion-Phillip S-REIT ETF before you invest

Lion Global Investors and Phillip Capital are due to launch the Lion-Phillip S-REIT ETF on the SGX on 30 October 2017. (The Initial Offer Period is open now until 17 Oct for investors who are interested in subscribing early.) The ETF is the very first exchange-traded fund in the world that invests purely in Singapore REITs.

S-REITs have been (and still are) a popular investment vehicle for investors seeking relatively high and stable dividend yield. The expected yield for S-REITs in 2017 is around 6%, and that’s just for dividends alone; the average year-to-date price performance for S-REITs is 14%.

There are currently 38 REITs in Singapore and, suffice to say, it’s easy to see why they are so well-liked by investors. Someone who doesn’t like to bother with stock picking can simply invest in a basket of all 38 S-REITs and be sitting on a total return of 21% so far this year!

Realistically speaking, though, it’s unlikely that a retail investor would undertake the exercise to invest in all 38 S-REITs. It’s a cumbersome task for the individual and the trading commissions alone would cause a small dent in your pocket.

Which is where the Lion-Phillip S-REIT ETF comes in…

Before this, there was no easy way to invest in a basket of S-REITs at one go. The closest alternatives were the Nikko AM Asia Ex Japan REIT ETF and the SGX APAC Dividend Leaders REIT ETF. But both funds only have around 60% and 30% of their holdings in S-REITs respectively – not ideal for the investor who wants to invest in only S-REITs.

But now you can, with the Lion-Phillip S-REIT ETF.

But should you?

Here are five things you need to know about the Lion-Phillip S-REIT ETF before you invest.

1. Pure Singapore REIT exposure

The Lion Phillip S-REIT ETF invests in 23 Singapore REITs. The constituents and their respective weight (as of August 2017) are shown in the table below.

SecuritySectorWeight
CapitaLand Mall TrustRetail10.76%
CapitaLand Commercial TrustOffice10.25%
Suntec REITRetail9.89%
Mapletree Commercial TrustDiversified8.98%
Keppel REITOffice8.54%
Ascendas REITIndustrial8.02%
Mapletree Industrial TrustIndustrial7.64%
Mapletree Logistics TrustIndustrial5.52%
Ascott Residence TrustDiversified4.54%
Mapletree Greater China Commercial TrustDiversified3.55%
CDL Hospitality TrustHotel & Motel3.50%
Starhill Global REITRetail3.44%
Frasers Commercial TrustOffice2.35%
Parkway Life REITHealthcare2.34%
Frasers Centrepoint TrustRetail1.97%
Keppel DC REITIndustrial1.71%
OUE Hospitality TrustHotel & Motel1.42%
CapitaLand Retail China TrustRetail1.26%
Lippo Malls Indonesia Retail TrustRetail1.12%
Frasers Logistics & Industrial TrustIndustrial0.88%
First REITHealthcare0.86%
Far East Hospitality TrustHotel & Motel0.76%
Frasers Hospitality TrustHotel & Motel0.70%

The maximum weight for a single constituent is 10% and the fund is rebalanced semi-annually. If a REIT exceeds 10% in weight, it will be rebalanced to within 10% at the next rebalancing.

Here’s the sector allocation based on asset value:

As you can see, the fund is concentrated in the office, retail, and industrial sectors which is understandable as the majority of Singapore REITs hail from these three areas.

It’s good to remember that although the Lion-Phillip S-REIT ETF is a pure Singapore REIT play, it doesn’t mean your investment is confined to the Singapore economy. For example, just to mention a few, Suntec REIT has properties in Australia, Mapletree Greater China Commercial Trust invests exclusively in Hong Kong/China, and Lippo Malls Indonesia Retail Trust owns retail properties in Indonesia.

So if you’re the type of investor who prefers exposure to the Singapore economy only, then you’d have to individually invest in REITs that only own Singaporean assets (e.g. CapitaLand Mall Trust, Mapletree Industrial Trust, etc.)

2. Passive ETF

The Lion-Phillip S-REIT ETF is a passive ETF. In other words, the fund manager does not actively manage the fund and simply tracks an index. In this case, the Lion-Phillip S-REIT ETF tracks the Morningstar® Singapore REIT Yield Focus Index.

Since the ETF tracks an index, the question I would ask is: “How then does Morningstar decide which REITs to place in its index, and based on what criteria?”

Unlike the S&P 500 which is hugely diversified and represents the broad market in general, the Morningstar® Singapore REIT Yield Focus Index only has 23 REITs (at this point). Therefore, the quality of its picks matters quite a bit more.

According to Morningstar, it constructs the Singapore REIT Yield Focus Index based on three criteria:

  1. Quantitative moat. An economic moat is a sustainable competitive advantage that allows a company to protect its long-term profits and market share from competitors. Morningstar uses an algorithm to determine the Quantitative Moat Rating to predict the Economic Moat Rating a Morningstar analyst would assign to a company. A score of zero can be interpreted as average, and a positive (negative) value implies high (low) quality.
  2. Distance to default. Morningstar uses an equation to calculate the probability that a company will go bankrupt and compares the score of the company to a peer group of stocks within the real estate sector of developed Asia Pacific markets (i.e. Singapore, Japan, Hong Kong, Australia, and New Zealand). The higher the score, the stronger the financial health of the company.
  3. TTM dividend yield. The higher the trailing twelve months dividend yield, the higher the score.

If you’re into finance equations, you can click on the links I provided above to read more about Morningstar’s methodology. In any case, it does seem that Morningstar’s rules for constructing the Singapore REIT Yield Focus Index favors the larger, more stable REITs with government-linked companies as sponsors (e.g CapitaLand, Mapletree, Ascendas-Singbridge, etc.) – which is obvious based on the three criteria mentioned.

3. Tracking error

When it comes to investing in an ETF that tracks an index, you want the ETF to have minimal tracking error. For example, if the index gains 10%, the ETF should likewise grow by a similar amount. I say similar because it is nearly impossible for a fund to mimic an index perfectly due to fees, transaction costs, cash drag and timing. However, a good manager should be able to reduce an ETF’s tracking error to a minimum.

At this point, the Lion-Phillip S-REIT ETF has no tracking error data since it hasn’t launched, but the manager is targeting to keep the tracking error to not exceed 3% per annum.

In my opinion, the tracking error is relatively high. In comparison, the tracking error of SPDR® Straits Times Index ETF is only 0.0893%. But we have to note that the constituents of the Straits Times Index are more liquid, which helps to reduce tracking error.

4. Expense ratio

Another important consideration when investing in an ETF is its expense ratio. In addition to management fees, the fund also has other costs like taxes, legal expenses, and accounting and auditing fees. Clearly, the lower the expense ratio, the better.

The management fee for the Lion-Phillip S-REIT ETF is 0.50% per annum and, according to the briefing I attended, the manager aims to have the total expense ratio (which includes the management fee) at around 0.60% per annum.

In comparison, the of SPDR® Straits Times Index ETF has an expense ratio of 0.30% per annum. The reason why a larger fund usually has a lower expense ratio is due to size and economies of scale. So while the expense ratio for the Lion-Phillip S-REIT ETF is a lot higher, it’s understandable because the fund is still new and a lot smaller.

5. 17% tax on dividends

The dividends derived by the fund is subject to the prevailing income tax rate, currently at 17%. The current trailing twelve-month dividend yield for the Morningstar® Singapore REIT Yield Focus Index is 5.75%. After applying taxes, your dividend yield shrinks to 4.77%.

In contrast, when you invest in an S-REIT as an individual, your dividends are tax-free. Dividends form a large part a REIT’s return and enjoying tax-free returns is a large part of the attractiveness of investing in S-REITs.

This is probably the biggest drawback of the Lion-Phillip S-REIT ETF which they unfortunately cannot avoid at this moment, unless the tax regulations change.

The fifth perspective

I believe some investors has been crying out for a pure S-REIT fund that allows them to diversify into a basket of quality S-REITs at one go. The Lion-Phillip S-REIT ETF may also interest foreign investors for the same reason and if so, this ETF is right up their alley.

If you’re a passive investor who wants exposure to S-REITs but doesn’t have the time nor interest to pick your own investments, then the Lion-Phillip S-REIT ETF might be suitable for you — if you don’t mind the fees and taxes.

However, the 17% tax on dividends is a huge disadvantage for investors, especially those who are looking to invest for income. So if the 17% tax on dividends throws you off and you prefer to earn higher returns for your money, then it might make more sense to just pick your own S-REIT investments.

Adam Wong is the editor-in-chief of The Fifth Person and author of the national bestseller Lucky Bastard! which made the Sunday Times Top 10 Bestseller’s List in 2009 and Value Investing Made Easy which made the Kinokuniya Business Bestseller’s List in 2013. In 2010, he appeared on U.S. national television on the morning show The Balancing Act. An avid investor himself, Adam shares his personal thoughts and opinions as he journals his investing journey online.

4 Comments

  1. Titus

    October 14, 2017 at 6:19 pm

    Hello! Thanks for the analysis. Been reading quite a bit of hype around this REIT ETF lately, with the main gripe about the tax and fees. Nothing is perfect I guess. I’m very green in terms of investing, and have been following your emails and articles. Would just like to know more about the actual costs, for say $20,000 investment and based on average dividends of 5% and fees of 0.60%. What amount would I be able to take home after 1 year? Apologies for this very newbie query! Guess this is my 1% learning daily ;)

    • Adam Wong

      October 15, 2017 at 5:19 pm

      Hi Titus,

      No worries. Always good to ask!

      Ignoring any capital gains, it would be:

      Fund expenses = $20,000 x 0.60% = $120
      Dividends after tax = $20,000 x 5% x 83% = $830

      Therefore,

      Net dividends less expenses = $830 – $120 = $710

      Which gives you a net return of 3.55% on your $20,000 in one year.

  2. Jonathan Lloyd

    October 16, 2017 at 8:39 pm

    Very informative summary!
    Given the relatively hefty management expense ratio (which I guess is on top of the individual REITs’ own management expenses) and the tax levied on the dividends I’d rather invest in REITs directly. In fact I already have been for several years and with excellent results.

    I attended the Fifth Person’s Dividend Machines course 2 years ago and that help me improve my REIT selection further. Well worth the investment.

    • Adam Wong

      October 17, 2017 at 1:22 pm

      Hey thanks, Jonathan!

      The ETF still has its benefits for those who want to simply diversify into a basket of S-REITs at one go, if they don’t mind the taxes and fees. But for those who are more hands-on with their portfolio, investing directly will earn you higher returns.

      Glad that you found Dividend Machines well worth the investment and helped to improve your REIT portfolio! :)

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