Home Trading ETFs Fidelity MSCI Real Estate Index ETF: Sometimes ‘Broader’ Is Better – Fidelity MSCI Real Estate Index ETF (NYSEARCA:FREL)

Fidelity MSCI Real Estate Index ETF: Sometimes ‘Broader’ Is Better – Fidelity MSCI Real Estate Index ETF (NYSEARCA:FREL)

by TradingETFs.com
Fidelity MSCI Real Estate Index ETF: Sometimes 'Broader' Is Better - Fidelity MSCI Real Estate Index ETF (NYSEARCA:FREL)


For as long as I have been in the financial services industry, the one constantly preached piece of advice was the need for exposure to “real assets.”

While it is easy to get caught up in the hype of the latest tech IPO or a company that is supposed to change the world, at some point, investors realize that it is much harder to justify a valuation for “ideas” versus real assets that have a definitive value.

For most investors, the most “real” investment they are likely to invest in is real estate.

While Seeking Alpha is all about fundamental analysis and empowering individual investors to finding those gems, it is perfectly understandable why the vast majority of real estate exposure will be through large mutual funds or ETFs, the largest being the Vanguard Real Estate Index Fund (VNQ) with over $33 billion in assets.

A number of years ago, we had a new entrant into the real estate ETF space, Fidelity, with their Fidelity MSCI Real Estate Index ETF (FREL).

The fund does undercut Vanguard with a lower annual expense, but what exactly makes it different? And is it worth your investment dollars?

Let’s take a look!

Investment Case

Despite being a huge company in the financial product’s world, Fidelity does not do a great job making a sales case for the fund.

Perhaps it is already popular as it is being the primary choice for Fidelity investors? Maybe… but Fidelity can surely spruce up their fund sites. One thing for certain, navigating the Fidelity site is nowhere as pleasing as an experience navigating BlackRock’s iShares website.

Fund Basics

  • Sponsor: Fidelity
  • Index: MSCI USA Investable Market Index IMI Real Estate
  • AUM: Approximately $779.8 million (5/24/2019)
  • Historical Style: US REITs
  • Investment Objectives: Seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI USA Investable Market Index IMI Real Estate.
  • Number of Holdings: 183 securities.
  • Current Yield: 3.07% 30-Day SEC Yield, 4.8% Distribution Yield
  • Inception Date: 2/2/2015.
  • Fees: .08%.

Source: YCharts & Fidelity

The Index and The Fund

As mentioned earlier, Fidelity does not do too good of a job presenting an investment case for the fund. Perhaps this is good as investors are forced to do their due diligence instead of seeing pretty pictures and graphs? Maybe, but I think if anything, it will drive many non-Fidelity investors to other sponsors.

The fund’s Facts Sheet simply highlights the objectives, strategy, and index description.

Source: FREL Fact Sheet 3/31/2019

One thing we have to make a point right here is that the Fidelity fund uses a different index than the Vanguard Real Estate Index Fund which tracks the MSCI US REIT Index rather than the MSCI USA IMI Real Estate.

If you are interested in investing in this ETF, you can find the underlying index methodology here.

So, let’s dive into the index methodology.

MSCI breaks down the broad US equity index into one of eleven GICS sector classifications. The index used by Fidelity is not a separate index you would ordinarily find on MSCI but rather the broad “Real Estate” sector of the MSCI US Equity Index.

Where the Vanguard fund differs is that it further takes the MSCI IMI Real Estate index and then excludes certain non-core sectors. This then forms the basis of the MSCI US REIT Index.

This should address some of the questions other authors brought up as to why the two funds differ.

Looking at the index characteristics, we can see that it is made up of 183 securities vs. just 37 for the US REIT Index followed by Vanguard.

Source: MSCI

Looking at sub-industry weights, we can see that “specialized REITs” make up nearly one-third of the portfolio.

Source: MSCI

Turning to the fund, we can indeed find that it’s well balanced.

Looking at the top 10 holdings shows us a fund consistent with most “market cap weight” capitalization methodologies. The top 10 holdings represent just under 34% of the fund, while the top holding, American Tower Corp (AMT), is the largest holding at over 7.65%.

Source: YCharts

One thing that every investor needs to understand is that despite the fund name not stating “US,” this is a United States focused fund as is stated by the underlying index and its methodology.

Source: Fidelity

Breaking it down by industry, we find the fund is consistent with the underlying index with the largest allocations being in specialized, retail, residential, and office REITs.

Source: Fidelity

Looking at the market capitalization breakdown, we can see that the fund is fairly well balanced between large- and mid-cap equities with a good allocation to small caps.

Source: YCharts

One of the critical things to watch with new ETFs is their capital raise.

Running an ETF is not cheap and there are always questions as to how long a sponsor will keep the fund open if it does not raise sufficient capital in order to generate income for the sponsor to keep the fund going. Over the past few years, we have covered a number of funds which seemed like great ideas, yet were not successful in their capital raise and were forced to shut down.

FREL has been successful in raising capital which now sits at $773 million or so. While FREL is not one of the largest real estate ETFs, I believe it is most certainly commercially successful.

ChartData by YCharts

While the fund’s assets under management were certainly helped by market performance, the bulk of the fund’s AUM growth was due to fund flows.

Source: YCharts

Interestingly, Fidelity also provides some risk measurement data for us.

Source: Fidelity

As we can see, this is an index fund; versus the underlying index, the ETF takes the same amount of risk and does have a negative alpha. The negative alpha is related to the fund’s annual expense.

Looking at the risk statistics provided by YCharts, we can see how the fund compares against the S&P 500. What we find is that fund has a five-year beta of .7423 vs. the S&P 500 and had a maximum draw-down of 15.67%.

Source: YCharts

What this tells us is that adding real estate exposure would certainly reduce volatility to an equity portfolio over the previous 5 years.

One other thing we have to track in the future is the maximum drawdown. The fund’s maximum drawdown of 15.67% is certainly not out of line; however, this is in a general bull market. The fund did not exist during the 2008 financial crisis.

Performance

Year to date, the fund has done quite well and achieved an 18.78% total return. The price per share is up 17.55% with the balance being made up of the dividend.

ChartData by YCharts

The fund has continued to perform well over the previous 12 months, and even accounting for the big drop in Q4 2018, the fund achieved a 17.96% total return. The price per share is up 12.1% and tells us that the dividends made up the balance.

ChartData by YCharts

Looking back three years, we see yet another example of why dividends are an important aspect of overall returns.

During this time, the fund achieved a 26.14% total return while the price per share increased a mere 11.48%. The dividends made up for more than half of the total return.

ChartData by YCharts

Since inception, the results are not much different. The fund achieved a 26.88% total return while the price per share increased just 6.69%.

ChartData by YCharts

This, of course, leads the conversation to the next two questions.

First, is the Fidelity MSCI Real Estate ETF offering anything in performance beyond the lower annual fees versus other major ETFs?

Secondly, are other actively managed investments capable of consistently outperforming FREL taking into account their higher fees?

To answer these questions, we can take a look at FREL against its largest US Real Estate ETF competitors including Vanguard Real Estate Index Fund, Schwab US REIT ETF (SCHH), and the iShares U.S. Real Estate ETF (IYR).

To see how it compares against an actively managed fund, we can look at the Nuveen Real Estate Securities Fund (FREAX)(FARCX).

As we can see, year to date, all of the funds performed in line with the exception of the Schwab fund which trailed slightly.

ChartData by YCharts

Over the previous 12 months, the trend continues with very little separating the ETFs. The Nuveen open-end mutual fund trailed very slightly due to its annual fee.

ChartData by YCharts

Looking back three years, we find the Fidelity fund comes out ahead. In this case, we can make the case that the broadest basket of funds came out on top versus any type of exclusions.

ChartData by YCharts

Going back to the fund’s inception date, we find that Fidelity fund had been the best performer, net of fees.

Interestingly, the Nuveen actively managed fund did beat out the Schwab ETF and would likely beat the iShares and Vanguard funds if you were in a lower fee share class. Of course, the value of active management generally presents itself during the bear markets.

ChartData by YCharts

Overall, in its short time period, the Fidelity ETF has led the way.

Bottom Line

Overall, the Fidelity ETF has done precisely what it was meant to do with very little marketing glitz or fanfare.

In this case, the fund provides investors broad real estate exposure without setting limits as to the types of REITs it can invest in.

If you are looking for broad real estate exposure with minimal fees, this fund is worth considering.

For more information on the fund, visit Fidelity’s website here.

Thanks for reading! I hope that was helpful and look forward to your questions or comments.

We all know, it’s not about how much you make, but about how much you keep. My focus will be on the latter – making sure you preserve the income that you earn.

With every new research article, Income Idea subscribers will be able to see a detailed analysis along with our take on the investment and the sponsor, along with actionable ideas and strategies of how to implement it into your portfolio if we feel it belongs there.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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