New Active REIT ETFs, Bigger Opportunities in Real Estate

And now, investors have plenty of ways to further enhance their appeal and potential returns.

That’s because the number of active ETFs in the asset class continues to grow. The new launches from REIT powerhouse Cohen & Steers are just the latest in the sector. Investors should pay attention. It turns out that active management in REITs can offer benchmark-beating returns.

While many asset managers have embraced the ‘get big’ attitude, offering exposure to a variety of asset classes and securities, some managers have honed their skills on a certain set of attributes. For example, Royce tends to focus on small caps, while Calamos has long been the convertible bond specialist. For real estate and REITs, Cohen & Steers has been the go-to name.

And now the REIT-focused asset manager can add an ETF sponsor to its resume.

Like many legacy asset managers, Cohen & Steers has been drawn to ETFs as a way to find new avenues of growth and keep more assets within its house. It’s no secret that many traditional fund types like mutual funds have bled assets to ETFs. Now, with the SEC allowing semi-transparent structures in ETFs, actively managed funds have been launched at a fevered pace. Many asset managers without ETFs under their product umbrella have been quick to jump on this bandwagon.

For Cohen & Steers, that meant launching three funds within its wheelhouse of real assets. They include the Cohen & Steers Preferred and Income Opportunities Active ETF (CSPF) and the Cohen & Steers Natural Resources Active ETF (CSNR).

Perhaps the most exciting one is the Cohen & Steers Real Estate Active ETF (CSRE). The actively managed fund will hold 30 to 45 REITs to focus on Cohen & Steers’ most high conviction picks and seek to provide a strong total return of income/capital gains.

Cohen & Steers’ latest launch is big. Not only is one of the largest real estate managers taking the active ETF plunge, but it is also doing so in a segment that truly benefits from active management.

Active management tends to work well in segments and asset classes that have a lot of moving pieces. Managers can exploit these inefficiencies and drive benchmark-beating returns. Real estate is one such sector.

Real estate encompasses a wide spectrum of assets. This can include a variety of different property types—apartments, offices, storage facilities—as well as sub-property types. Shopping malls, grocery-anchored strip malls, and outdoor power centers are all different styles of retail locations. Moreover, locational differences abound within the real estate sector. Office buildings in California may be suffering, while those in the Sunbelt may be thriving.

Second, real estate investing is all about the cost of capital, cash flows, and debt levels. There are a lot of metrics and other points to consider when analyzing a REIT or property. Understanding how a firm has locked in mortgage costs, the effects of rising rates, property values, and rent increases lends itself to an active touch. Here, managers can once again exploit values and strong firms to produce a portfolio of winners.

Active managers can also exploit those property types that have dramatic growth tailwinds. For example, data centers have enjoyed a surge as A.I. continues to dominate the narrative. For investors in a passive indexed vehicle, they often underweight these smaller subsectors of the market and they are forced to own the good and the bad.

The proof is in the pudding. This chart from Cohen & Steers highlights the active advantage in REITs across the last one-, three-, five-, and 10-year periods. Morningstar data also supports active management’s win in the sector.

Source: Cohen & Steers

Perhaps the biggest win for investors is that ETFs enhance active management even further.

One major win for active ETFs over other active strategies is on cost. Active ETFs cost less to run than mutual funds. This provides a lower ‘fee hurdle’ to clear and creates an easier time to beat passive benchmarks. For example, expenses for the Cohen & Steers ETF will run at just 0.70% or $70 for every $10,000 invested. The Cohen & Steers Realty Shares mutual fund is run by the same managers and has a nearly identical strategy but costs 1.19% for A shares and 0.88% for institutional shares.

Better still, active ETFs can benefit from lower taxes. Thanks to their internal tax structure, REIT dividends are higher than the broader market. However, they don’t qualify for lower dividend tax rates. Because managers often change their holdings, capital gains can add a nasty tax surprise for investors holding REITs in a taxable account. However, with ETFs, capital gains are eliminated and not passed on to investors.

The result is that active ETFs only enhance the opportunity for active REIT management.

These ETFs were selected based on their active exposure to the real estate and REIT sector. They are sorted by their YTD total return, which ranges from 2.2% to 3.5%. They have expense ratios between 0.17% to 0.72% and assets under management between $16M to $1.5B. They are currently yielding between 2.1% and 3.7%.

All in all, the Cohen & Steers fund could be seen as a real win for investors and underscores the appeal of active real estate management. Overall, active ETFs beat passive strategies within the sector and now investors have the ability to tap a world-class manager in the sector. No matter which ETF they choose, they should make it an active one when it comes to real estate.

The latest Cohen & Steers ETF launch is just the latest in the real estate space. And for good reason. Offering market-beating returns and the potential for lower taxes/costs, REITs are one of the best sectors to exploit the best of active management.