There has been a lot of talk recently about falling residential property prices, but many investors are still looking at commercial real estate investment trusts (REITs) as a strong income investment. Is the Vanguard Australian Property Securities Index ETF (ASX: VAP) the best option?
Why invest in REITs and property ETFs?
The media has been filled with reports lately of doom and gloom for the Australian property market, with many economists and investors predicting large declines in prices. However, most of these reports focus on residential real estate. Although some ASX REITs invest in residential property, the vast majority hold assets in the retail, industrial and office sectors. While these property sectors may also experience declines, they are not the same as the residential market and many investors look to REITs for income rather than growth.
Particularly in our current low interest rate environment and with many companies cutting dividends, REITs and property ETFs start to look more appealing.
The best Australian property ETF
There are a handful of international property ETFs on the ASX, but the three main Australian property ETFs are the Vanguard Australian Property Securities Index ETF, the SPDR S&P/ASX 200 Listed Property Fund (ASX: SLF) and the VanEck Vectors Australian Property ETF (ASX: MVA).
Each of the three ETFs invests in ASX-listed REITs and follow slightly different benchmarks: the S&P/ASX 300 A-REIT Index, S&P/ASX 200 A-REIT Index and the MVIS Australia A-REITs Index respectively.
The VAP and SLF ETFs, despite using different S&P/ASX benchmarks, have exactly the same holdings in their top 10, including Goodman Group (ASX: GMG), Scentre Group (ASX: SCG) and DEXUS Property Group (ASX: DXS). Since the top 10 holdings make up more than 80% of the total holdings for both of the ETFs, their portfolios and exposure are very similar.
The MVA ETF has many of the same top 10 holdings but with different weightings, as it follows a rules-based index. MVA focuses on the largest and most liquid ASX REITs but limits individual weightings to a maximum of 10%. In comparison, Goodman Group accounts for more than 23% of the SLF ETF. In this way, MVA is arguably a more diversified ETF.
Why I would choose VAP
If I was choosing between these three ETFs, I would pick VAP. The different benchmarks used only result in minimal variation between the portfolios so each of these three ETFs provides very similar exposure. This is reflected in performance over the past five years where SLF has returned 3.48% per year, compared to 4.06% from VAP and 5.16% from MVA.
Looking more closely, all three ETFs have provided minimal or negative growth and the difference in performance mostly comes from dividends.
While MVA has shown the highest returns, I would still choose VAP for the fees and size. VAP is three times the size of SLF and has the lowest management fee (0.23% per year compared to 0.4% for SLF and 0.35% for MVA) and the lowest spread (0.12% compared to 0.22% for SLF and 0.35% for MVA). The returns have not been significantly different in the past and the similarity between each ETFs’ holdings leads me towards picking the cheapest and largest option.
Disclosure: At the time of writing, Max does not have a financial interest in any of the companies mentioned.