champpixs
Back in April 2023, I covered Global X SuperDividend REIT ETF (NASDAQ:NASDAQ:SRET) indicating that this ETF is a clear sell due to the overly aggressive asset allocation policy. In my view, the then-offered dividend yield of 7.5% was not sufficient to preserve SRET’s risk profile.
At the same time, I also highlighted three REIT alternatives, which offered similar yields, but with way more balanced risks.
These three names were:
Now, let’s contextualize SRET’s performance with that of MAC, CUZ, and GMRE.
YCharts
All three REITs have clearly outperformed SRET. Plus, even the broader equity REIT market has done ~ 200 basis points better than SRET.
While it is clear that SRET has generated negative alpha, it has still managed to register positive total returns despite its exposure to rather aggressive risk factors.
In my opinion, there are two major reasons, which have helped SRET avoid a steeper underperformance or even negative returns over this period (since I issued a sell rating):
- Greater visibility on the future path of Fed Fund’s rate in combination with market’s expectations of experiencing a series of interest rate cuts already in 2024. These dynamics have benefited the entire universe of duration-loaded assets, which obviously include commercial real estate (and SRET). Namely, it would be extremely difficult to actually not enhance in value when there are so strong tailwinds in the background.
- The structure of SRET’s portfolio in terms of how the exposures have been assigned to each specific sector has recently benefited a lot. Namely, among the Top 3 sector allocations SRET carries health care and diversified REIT names that have done very well in the past half year or so. Moreover, the fact that the office – riskiest and worst-performing REIT sector by far – has only accounted for ~14% of the total portfolio has, in turn, avoided suffering from notable drawdowns.
Thesis update
The question now is whether SRET is still a sell or whether the prospects have improved so that a more positive rating could be assigned.
By looking at the dividend chart below, we could imply that a bottom has been already achieved due to massive cuts in early 2020 and slight follow-up adjustments to the downside in January 2023.
Seeking Alpha
In fact, even though SRET is inherently a rather risky ETF, the monthly dividend distributions have been relatively stable in the past ~ 3-year period (excluding one $0.01 per share dividend drop). All of this indeed indicates that the prevailing dividend of 7.5% could be deemed stable.
Moreover, from a fundamental perspective, the underlying constituencies of SRET are now in a much better position relative to where they were at the start of 2023.
The fact that interest rates have peaked and are set to gradually standardize over the course of 2024 should automatically supply strong tailwinds across the board in the real estate space.
In SRET’s case, we have to recollect that there is a significant bias towards small-cap and relatively speculative REITs with weaker balance sheets compared to sector averages. This is because of the focus on extremely high-yielding stocks, which per definition imply lower valuations (and lower valuation tend to be associated with weaker fundamentals that necessitate additional risk premiums in the discount rates).
In the current scenario of normalizing interest rates, these more risky REITs are greater beneficiaries as in the context of clarity on the interest rate peak level and the assumption of dropping SOFR, the access to financing is considerably improved.
On the flip side, the fundamental mechanics of SRET have not changed. For example, if we look at the top sector-level exposures, SRET still seems heavily concentrated in sectors, which embody high uncertainty and sensitivity to the changes in the overall economy.
Health care, mortgage, and office REITs together constitute more than 60% of the total AuM. These three sectors specifically could not be deemed safe at all.
Global X Management Company LLC
For instance, office is facing not only financial difficulties but also structural ones that are mostly associated with work-from-home dynamics. Here, whether the interest rates land at 4% or 3% does not really matter that much provided that there are secular issues in the occupancy end. Mortgage REITs, however, are per definition viewed as the most volatile and unpredictable sector (asset type) in the overall commercial real estate space. It tends to exhibit great sensitivity to the changes in the economy, which currently considering the looming recessionary risk seems just too speculative.
Here comes a quick reminder of how SRET allocates its capital:
- REITs in the selection pool (minimum capitalization of $100M) are ranked in descending order based on their dividend yields.
- 60 companies, which have landed at the top of the list advance advocate to the volatility filter.
- 30 REITs are then selected and included in SRET’s portfolio that has registered lowest volatility levels over the trailing 90-day period.
Again, this kind of REIT selection process does not include any layer of fundamental risk analysis based on which value traps could be filtered out. The fact that SRET has made a series of notable divined cuts as reflected in the chart above is a clear testament to this.
In my opinion, if investors’ strategy is long-term buy and hold, sooner or later SRET will have to suffer similar reductions of dividends (due to a heavy concentration in potential value traps) as we have experienced before with this ETF.
The bottom line
My previous recommendation to go short SRET has failed.
When I made the case of going against this ETF, I also indicated 3 other REITs (MAC, CUZ, and GMRE) that offered greater yield and risk-adjusted return profile. All of these three REITs have considerably outperformed SRET.
Yet, the fact that SRET has managed to register ~8% total return performance despite a minor dividend cut, renders the case unsuccessful.
One of the main reasons why SRET has ticked higher is the emergence of strong tailwinds that are associated with more accommodative interest rate environment (i.e., where there is a clarity on the peak level and the assumption of SOFR decrease already in 2024).
Considering the fact that a falling interest rate environment provides per definition a structural boost for duration-loaded assets such as real estate (and SRET), it would be very risky to go against SRET, especially where the underlying holdings are small-cap and relatively discounted that tend to be one of the greatest beneficiaries of more accommodative interest rates.
With that being said, the fundamental problems with SRET are still there. Ca. 60% of the portfolio is placed in volatile and unpredictable sectors that coupled with a significant concentration risk (i.e., 30 holdings) in REITs, which are picked based on how high dividend yield they are able to offer, make this ETF an inherently speculative bet. So, it is neither a sell nor buy. It is a hold for me.
