Many Wall Street pros have marked commercial real estate as the next pressure point for the U.S. economy, but one new fund will give investors a way to make a contrarian bet. Columbia Threadneedle is launching the Columbia Research Enhanced Real Estate ETF (CRED) on Wednesday, focused on real estate investment trusts. The fund is part of the firm’s “strategic beta” lineup and will track a custom index. Commercial real estate has become a growing area of concern for investors and economists in recent months after rapid rate hikes from the Federal Reserve and fears of a recession later this year have pressured REITs on both the expense and revenue sides of their business. The murky outlook has made liquidity a potential issue for the companies and investors alike. The private Blackstone Real Estate Investment Trust has repeatedly halted redemptions in recent months because investors have hit the fund’s stated withdrawal limits. However, Marc Zeitoun, Columbia Threadneedle’s head of strategic beta, said that the potential end of the Fed’s rate hiking cycle this year and a recent rebound for some real estate stocks suggests that now is when investors should start thinking about jumping back in to REITs. “We think the time to get into something is when it is not obvious for everyone. We may be early, but we’re not too early, and we definitely don’t want to be late,” Zeitoun said. Columbia Threadneedle does not appear to be alone in thinking the bottom is near for real estate. Jeffrey Gundlach’s DoubleLine launched a fixed income ETF focused on commercial real estate ( DCMB ) that began trading earlier this month, and iShares debuted an environmentally focused ETF in February ( ERET ). Both funds have seen limited trading volume so far. The University of California also invested $4.5 billion into BREIT, the non-listed Blackstone Real Estate Income Trust , in January. Office building loans in particular are being watched closely, as the work-from-home trend sparked by the pandemic has led to elevated vacancy rates in some major U.S. cities. Columbia Threadneedle portfolio manager Christopher Lo said the custom index used by the fund does not have specific targets for weightings of different subgroups within the real estate industry. The fund does have some office building exposure, but its top holdings on its first day include warehouse REIT Prologis and telecom REIT American Tower . Another potential benefit of the custom index approach is that the fund can try to filter out the more obvious bad apples. The custom index, created by Columbia Management and its real estate subsidiary Lionstone Investments, took the broad FTSE Nareit All Equity REITs Index and divided it into five groups based on quantitative factors. The two groups with the worst scores are excluded from the fund. The least liquid of the remaining REITs are also excluded, according to the fund’s prospectus . “If you just look at the universe and say I want the highest yielding names, you might end up having names that give you poor total returns,” Lo said. “That’s why the step two in our process is to filter out names that have strong sell and sell ratings, so the remaining constituents, when we look at yield from that perspective, you get good quality companies and good quality yield that is sustainable and high quality over different market conditions.” The fund is not market-cap weighted. Instead, quantitative scores and geographic considerations are taken into account when determining the weightings during the index’s annual rebalance. “We think with real estate, location, location, location. Understanding where these REITs are investing is just as important as anything else. That tipped us off to let’s use the ratings to determine who stays in the universe, but let’s use the geography to determine an overweight or an underweight,” Zeitoun said. CRED is Columbia Threadneedle’s 12th ETF. So far, the firm’s fixed income funds have proven more popular with investors than its equity offerings. The fund will have an expense ratio of 0.33%, and its yield should be around 4% when it launches, according to Lo.
