Avoiding Mistakes is Advanced Learning

Is REIT ETF RIET right for long-term investors?

“The only mistakes you can learn from are the ones you survive.” Jim Collins

The second-best way to learn is to make mistakes. Of course, you need to survive the mistake for it to be second best. The best way is to listen to advice and seek counsel and wisdom from someone who knows more than you or I do. I have used the second-best way many times, so my goal is to attempt to help investors use the best way. That does not mean I am always right, but I have made enough mistakes that I can be like the author of Proverbs and suggest that some paths are destruction when it comes to investing. Of course, there is something more important in life than investing for the future. I hope my readers know what Solomon is talking about when he says, “In all your ways acknowledge him, and he will make straight your paths.” Proverbs 3:6

A New Real Estate Sector ETF

Hoya Capital High Dividend Yield ETF. SOURCE: HOYA CAPITAL

Occasionally I hear about a new ETF, and I get my hopes up. Such was the case when I heard about a new real estate Investment trust ETF called RIET. This REIT is named, “Hoya Capital High Dividend Yield ETF.” The source of the new information was, as is often the case, a Seeking Alpha article by Jussi Askola. His article was called, “VNQ Vs. RIET: What’s The Best REIT ETF?” A link for his article will be at the end of my post. I borrowed images from that article because they are from Hoya Capital. Those will be identified in the text below the images.

There are reasons to like this ETF, and also some cautions that most investors should consider before investing in this ETF. After the fund description, I discuss the benefits of RIET first.

The Fund Description

ETF Series Solutions – Hoya Capital High Dividend Yield ETF is an exchange traded fund launched by ETF Series Solutions. The fund is co-managed by Hoya Capital Real Estate, LLC and Penserra Capital Management, LLC. It invests in the public equity markets of the United States. The fund invests in the stocks of companies operating in the financial, diversified financials, mortgage real estate investment trust, real estate investment trusts, real estate, equity real estate investment trust, real estate management and development and real estate operating companies’ sectors. The fund invests in growth and value stocks of companies across diversified market capitalizations. It invests in dividend paying stocks of companies. It seeks to track the performance of the Hoya Capital High Dividend Yield Index, by using full replication technique. ETF Series Solutions – Hoya Capital High Dividend Yield ETF was formed on September 21, 2021 and is domiciled in the United States.

The investment seeks to track the performance, before fees and expenses, of the Hoya Capital High Dividend Yield Index (the “index”). The index is a rules-based index that is designed to provide diversified exposure to 100 U.S.-listed real estate-related securities that collectively provide income through high dividend yields. Under normal circumstances, at least 80% of the fund’s net assets will be invested in dividend-paying securities, which includes equity securities that have paid a dividend in the prior 12 calendar months. The fund will invest in all of the component securities of the index in approximately the same proportion as in the index.


The Benefits of RIET

From the fund description I see several reasons to like this fund. Notice that is it diversified into different types of real estate investments. This is good. Notice also that there is an attempt to blend value and growth and to be market-cap diversified. The fund also seeks dividends.

RIET Sector Diversification is excellent. SOURCE: HOYA Capital
RIET Sector Diversification. SOURCE: HOYA CAPITAL

In addition, RIET offers diversification and pays their dividend monthly. This is attractive for retired investors. REIT also has a model that is not heavily weighted in the top ten. It is unusual to see an ETF with a “top ten” holding percentage less than 20% and RIET has 16.47% in their top ten. The dividend yield is also very attractive at 7.14%. None of the other ETFs comes even close to that.

RIET Top Ten Holdings. SOURCE: Seeking Alpha

The Competition is Fierce for RIET

Some “good” REIT ETFs are VNQ, IYR, SRET, KBWY, RWR, and USRT. I use the word “good” very carelessly here. I actually don’t think any of these is really a good choice, but probably VNQ and IYR are the best of the bunch. The problem I have with all of theses is the investment mix and dividend rewards of all of them. Hence my interest in RIET. Sadly, I must offer some cautions regarding RIET.

The Cautions Regarding RIET

RIET Top Ten Holdings. SOURCE: Seeking Alpha

I am baffled by the fact that RIET holds 10.52% in corporate bonds. I don’t want bonds in my investment mix. VNQ, by way of comparison, has 98.75% of their funds in company stocks. IYR has 99.26%. It feels like the RIET managers are afraid to invest in real estate.

Secondly, RIET is a very small fund. AUM (Assets Under Management) is only $23.99M. In fairness, this is a new fund, but to have assets less than $1B (billion) is additional risk. VNQ has $72.00B and IYR has $4.08B.

RIET Detailed Quote shows Net Assets as very small. SOURCE: Fidelity Investments

RIET also has more risk because it is “new” and relatively unproven. Do the ETF managers really know what they are doing? The fund started September 21, 2021.

Although Seeking Alpha “authors” rate RIET as a “Strong Buy”, there is no QUANT rating for this ETF yet. The SA “authors” with the “Strong Buy” rating is really just one person: Jussi Askola.

Jussi Askola’s Advice

“I see RIET as a great compliment to an active REIT strategy to get some instant diversification (100 names + the preferred sleeve) and to “bump up” the yield without straying too far down the risk spectrum. And importantly, I think RIET has delivered on our primary goal of creating a better/cheaper/diversified version of some of the highest-yield REIT ETFs (SRET, REM, MORT, KBWY) that we know have clear shortcomings.”

My Advice

So now you want to know if the positives outweigh the cautions. I will admit that I am tempted to buy some shares of RIET. One of my motivations is to watch it more closely by having some money in the game. However, in my next post I will give you what I think is a better approach. You can “build your own ETF.” That is what I have done. I can help you get started.


Seeking Alpha Article: Seeking Alpha VNQ Vs. RIET: What’s The Best REIT ETF?

All scripture passages are from the English Standard Version except as otherwise noted.