Nikko Asia REIT ETF and Phillip APAC REIT ETF – A Comparison March 13, 2017

With Additional Information on Interest Rates

It is an exciting time in our local market. We see STI experiencing a rally of close to 220 points with 7% gains, making them one of Asia strongest benchmarks in 2017 YTD. We might see another interest rate hike happening this month and a new launch of Nikko REIT ETF. In this article, I would also like to share some views on interest rates (due to popular demand) and compare the differences and similarities of Nikko Asia REIT ETF and Phillip APAC REIT ETF. Please note that I am currently not vested in either ETFs to prevent any conflict of interest. I do own shares that are components of these ETFs.

Current interest rate environment
Currently, market participants are expecting a gradual rise in interest rates and the one we are looking out for would be this month. In my personal opinion, the rise may happen because we have been seeing more and more Fed officials like William Dudley, Lael Brainard, Jerome Powell and Janet Yellen communicating in a coordinated fashion especially when some of them were dovish at the start but have since begun supporting for the interest rates to be increased soon. Usually, the regional speakers air their opinions as individuals but we are currently seeing more alignment.

Lastly, the latest economic data has been cooperating along with Fed decisions. The US weekly jobless claim was found to be at a 44-year low last week, dropping by 19,000 to a seasonally adjusted 223,000. This is below analyst expectations, increasing the case for an early hike.

Why do interest rates matter?
1. Loans – pegged to SIBOR (Singapore interbank offer rate). As the Fed rate hike increases, rates will affect sectors that borrow in variable loans instead of fixed. Most big companies like Capitaland Commercial Trust or First Reit have 80% and 92% of their loans on fixed in order to limit risk.
2. Valuation – most real estate discount cash flows from rentals to calculate a fair market value of the company. When interest rates increase, utilizing the DCF method for the value of the property would require a higher discount rate to be used. This in turn will lead to a fall in property prices.
3. Opportunity Costs – in an increased interest rate environment, investors will tend to shift their focus from investment properties to higher yielding products such as short term treasury bonds.

Nikko Asia REIT ETF & Phillip APAC REIT ETF
Overall, REITs are generally well prepared for interest rate hikes because companies have been restructuring their debt portfolio for the past few years and when we consider economic fears over Brexit, a delay in fed hike and other political factors, REITs are an attractive asset class to hold from a portfolio and passive investing perspective.


Nikko Asia ETF listing schedule

Roadshow / Bookbuilding: 6th to 21st March 2017
Public Offer: 6th March 2017
Listing on SGX mainboard: 29th March 2017


Differences

Nikko AM-Straits Trading Asia ex Japan REIT ETF Phillip SGX APAC Dividend Leaders REIT ETF
Number of Component Stocks

23* 30*
Sector Weightage See graph below
Dividend Pay-out + Rebalancing Frequency 4 2
Countries Listed REITs Singapore, Malaysia, Hong Kong** Singapore, Australia and Hong Kong**
Total Expense Ratio 0.6% 0.65%
Benchmark Index FTSE EPRA/NAREIT Asia Pacific ex Japan Index SGX APAC Ex-Japan Dividend Leaders REIT Index
Index Weightage Methodology Security must qualify as a REIT Market Cap Capped Max 10% of singular counter Total dividends paid* free float Capped Max 10% of singular counter
Trading Currency SGD USD (Primary) and SGD

* Component stocks in the list vary as well
** Geographic breakdown may include different countries like China & Indonesia as certain REITs listed in their local exchange may have properties that based in other countries.


Factsheets


Similarities

ETF replication method Physical Replication
Listed Exchange SGX
Key Qualities Proxy to Asia’s Growth, Diversification on a single trade (Easy to rebalance)
Tracking Error Risk Due to fees and Expenses
Liquidity Risk Dependent on size and state of markets
Market Risk Price may be influenced by political, economic, earnings and interest rate conditions

Which is better?
In my opinion, a better question to ask would be: which ETF is suitable for you? For example, if you are currently holding onto a lot of Singapore REITS in your portfolio, it might be wiser to look for a different geographic exposure for diversification sake. The same would apply to a scenario in which you are holding onto a lot of Australia REITs or if you need a bigger exposure to industrial REITS. Some other considerations would be your investment knowledge and risk profile. All these questions will probably assist you in deciding which ETF is suitable for you. It is all about ensuring a more efficient allocation of funds.


If you wish to know more information about ETFs or any other stocks, you can speak to your designated Trading Representatives or a Dealer at a Phillip Investor Centre near you.

Disclaimer

These commentaries are intended for general circulation. It does not have regard to the specific investment objectives, financial situation and particular needs of any person who may receive this document. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. Opinions expressed in these commentaries are subject to change without notice. Investments are subject to investment risks including the possible loss of the principal amount invested. The value of the units and the income from them may fall as well as rise. Past performance figures as well as any projection or forecast used in these commentaries are not necessarily indicative of future or likely performance. Phillip Securities Pte Ltd (PSPL), its directors, connected persons or employees may from time to time have an interest in the financial instruments mentioned in these commentaries. Investors may wish to seek advice from a financial adviser before investing. In the event that investors choose not to seek advice from a financial adviser, they should consider whether the investment is suitable for them.

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About the author

Sky Kwah Wen Yao
Dealing Manager

Sky Kwah is part of the POEMS Equity Dealing Team that provides dealing services to over 28,000 trading account customers.

Sky gives talks in tertiary institutions like NTU & SIM and he often conducts seminars on Fundamental Analysis, most recent was at the Investfair 2016. He particularly focuses on value stocks in Singapore and the US with a top-down macro approach. He is frequently interviewed by MediaCorp News 938Live radio station or 联合早报 as a market commenter and he hopes to help clients become better stewards of wealth and believes in succeeding in what truly matters – the fullness of life.

Sky holds a Bachelor Degree of Commerce with a triple major in Financial Accounting, Investment Finance, and Corporate Finance, from the University of Western Australia.

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