The dividend income retirement mindset is imperfect, but would I invest in a REIT ETF?

I have been busy with work recently; hence less time for reading. Less time and energy in fact for blogging. The most recent article(s) that caught my attention was Kyith’s post.

I Don’t Write All These Retirement Income Bullshit Just for Clicks. (read here)

9 Strong Points to Why I Say, the Dividend Income Retirement Mindset is Not a Good Retirement Risk Management Model. (read here)

Personally, I believe anyone has the right to post their views. They are personal opinions. Kyith backed up some of his points with historical data which is great. Nevertheless, what works for him may not work for you or me. It is great that he shared his views. Unfortunately, when we air our opinions in public we do occasionally get negative comments.

Let me share my opinion. From a very layman’s retail investor point of view. FYI I am not working in the financial sector and I don’t really have much time to analyze ETFs.

First off I am not saying I disagree with what Kyith mentioned. I really appreciate his effort for sharing his thoughts.

I believe I have an unbalanced barbell investment portfolio. A significant portion of my portfolio are in dividend stocks. Perhaps I subscribe to Alvin Chow (from Dr. Wealth)’s notion that the fewer stocks you have, the more work you do, while the more stocks you have the less work you do (Watch here, forward to 14.45). This made me think of the word ‘char-pa-lang’ in Kyith’s post (see below). I hope my portfolio is not too ‘char-pa-lang’ (or ‘rojak’, a phrase he used before) :p.

Nevertheless, I would like to highlight some points. I think it is good to back up points with historical data, but often history is not representative of the future.

In addition, I will just limit this discussion to a couple of the REIT ETFs mentioned in Kyith’s post titled, “A Review of Singapore-Listed REIT ETFs Returns, Dividend yields and 34 Years of Global REIT Rolling Returns.” (read here), which kind of led to queries and consequently the subsequent posts.

For me, I see some psychological hurdles (personal doubts) if I am to really invest heavily in the REIT ETFs.

The relatively Short history of the REIT ETFs mentioned

Of the 5 above ETFs mentioned, the earliest inception date (among the 5 of them) is on 20 Oct 2016. Moreover, the inception dates of 2 of the ETFs are in 2021.

The pandemic: The World Health Organization officially declared COVID-19 a global pandemic on March 11, 2020. In Singapore, earlier in 2020, there are three phases of planned reopening were announced, which is only relevant to the zero-COVID strategy. These were however ended on 8 May 2021 because of the Delta variant.

So the relatively short historical price performance of the ETFs would have been impacted by the pandemic (to quite a great extent).

As much as I would like to lean on historical data to give confidence (or recency bias) or extrapolate into the future, I personally would not trust the data. This is unlike the other index ETFs eg. S&P500 Index ETF etc.

Fee matters

I think we can all agree that although initially, the fees (percentage-wise) appear small. However, they can add up to a substantial sum over time, especially when the investment amount snowballs over a long period of time. With local stocks, you typically pay the initial brokerage fee and that’s it. With local dividend stocks – there are no taxes; no custodian fees, etc. You pay fees when you buy and sell, not for holding.

ETFs have fees.

In investing, you get what you don’t pay for. Costs matter. So intelligent investors will use low-cost index funds to build a diversified portfolio of stocks and bonds, and they will stay the course. And they won’t be foolish enough to think that they can consistently outsmart the market.John C Boyle

Vanguard founded by John C Boyle pride itself on its low fees. For example, the Vanguard S&P 500 ETF has an expense ratio (as of 11 April 2023) of 0.03%.

What about these REIT ETFs?

Lion-Phillip S-REIT ETF Expense Ratio: 0.6%

NikkoAM-Straits Trading Asia Ex-Japan REIT ETF Expense Ratio: 0.6%

Phillip SGX APAC Dividend Leaders REIT ETF Expense Ratio: 1.16%

CSOP iEdge S-REIT Leaders Index ETF Expense Ratio: 0.6%

Singapore REIT ETFs Comparison (read here)

BTW the expense ratios here for some of the REIT ETFs are slightly different from the total expense ratios stated in the table above from Kyith’s post.

Anyway, the REIT ETF expense ratios are not as low as the Vanguard S&P 500 ETF expense ratio, and yeah… no fees by holding individual local stocks. In fact, with so many low-cost brokerages available to local investors here, many of these brokerages do not charge custodian fees for holding selected foreign (eg. Hong Kong or US) listed stocks.

When there are variations of the haystack

I think Index funds or ETFs, in general, have come a long way since John C Boyles (aka Father of ETF) created the index mutual fund in 1975. In 1976, influenced by the works of Paul Samuelson, Bogle created the First Index Investment Trust (a precursor to the Vanguard 500 Index Fund) as the first index mutual fund available to the general public. (Anyway, there are some differences between an ETF and an index fund – but shall not go into specifics).

One investing ethos that many retail investors believe in is as per below:

“Know what you own, and know why you own it” Peter Lynch

Yes, although I do not have time to be very thorough in my investing research, minimally I need to know why I buy certain stocks and what is the company behind the stock.

“If you’re prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won’t get bored.” Peter Lynch

I basically need to have conviction. Yes, the historical data of the REIT ETFs are there for all to see. However, essentially I need to have a simple liner to let me understand what is within the product.

Active vs. Passive Investing: Which suit you? (read here)

Adam Khoo has a more simplified way of saying why he prefers to invest in individual stocks rather than in a basket of stocks. Eg. S&P500 consists of 500 companies, but not all are good companies/stocks. If you know how to analyze the good from the bad companies, you could just invest in the good (rather than the basket of good and bad).
Then again – I personally must confess I am not as good at analyzing. However, I seriously have doubts about some of the smaller cap ‘bad’ (or just have not heard of them) companies within the S&P500.

But basically, for me, I need to have some reasons to convince myself to hold on to my investments when the tide turns. Hence I can’t help but find out what is behind the stocks, or in this case the ETFs. As much as I hate going down the rabbit hole.

Frankly, for many of these mega-cap stocks, the companies behind them are already conglomerates. Large companies made up of independent entities that operate in multiple industries. Tencent and Alibaba come to mind. Investing in Tencent is basically like investing in an ETF by itself. And since we are talking about REITs, there are also many big cap diversified REITs (consisting of retail, office, industrial, and logistic assets; diversified across many regions geographically), not that many pure REITs.

So a REIT ETF is basically a basket of a bunch of entities….(ok going down the rabbit hole again)…

It is also not as diversified as the S&P500 but not as concentrated as a retail investor’s own diversified dividend portfolio. There are now many sub-categories/sector ETFs. Like a hybrid entity between a market index ETF (eg. Vanguard 500 Index Fund ETF, VOO or an income/dividend ETF) and a diversified portfolio of stocks.

Hmm.. maybe one day (or has it been created), someone will create an ETF consisting of a basket of the ‘best, large-cap, most liquid’ ETFs…… :p

So basically, from the original haystack of the low-cost S&P500 ETF, we now have many many other ‘subset’ haystacks (ETFs).

Anyway if I am to invest in a REIT ETF, I need to know what are the principles that guide the selection of the various REITs that form part of the basket of REITs, and what’s the rationale behind the percentage/proportion for each REIT.

I know the components /weightage are reviewed regularly (probably quarterly)…

For instance, among the 5 REIT ETF, the ETF with the biggest fund size is NikkoAM-Straits Trading Asia Ex-Japan REIT ETF. The investment objective of the Fund is to replicate as closely as possible, before expenses, the performance of the FTSE EPRA Nareit Asia ex Japan REITS 10% Capped Index (“Index”).

Looking beyond the index (read here)

To quote the above article (emphasis mine):

“The FTSE EPRA Nareit Global Real Estate Index Series is one of many benchmarks tracking the performance of S-Reits and property trusts.

The index series, jointly developed by FTSE Russell with the European Public Real Estate Association (EPRA) and the National Association of Real Estate Investment Trusts (Nareit), is a widely followed global benchmark with an estimated US$340 billion of assets under management actively benchmarked or passively tracking the indices.

According to the latest index factsheet (as at May 20, 2021), there are 19 S-Reits and property trusts in the FTSE EPRA Nareit Global Index. Quarterly index reviews are in March, June, September and December, based on data at the close of business of the Monday four weeks prior to the review effective date.

Based on the index methodology, index inclusion is subject to but not limited to, meeting various requirements such as sector, size, liquidity and free float. These include being listed on an official stock exchange, companies in the core business of real estate or deriving at least 75 per cent of Ebitda from relevant real estate activities and having a minimum free float of 5 per cent.

Securities are tested for liquidity semi-annually in March and September and non-constituents must meet a minimum liquidity turnover at least 0.05 per cent of their shares in issue based on their median daily trading volume per month, in 10 of the 12 months prior to the review.

The size rule is a relative measure expressed as a percentage of the regional free float index market capitalisation.”

Ok as mentioned in the article… after reading it, yes I (who am not from the financial industry or studied finance) roughly have an idea behind the index methodology. However, to be frank, it is still quite vague. I am not sure how the percentage holding of each component was derived. Ok…but is investing based on sector, size, liquidity, and free float; deriving at least 75 percent Ebitda from relevant real estate activities – giving me enough conviction to hold?

Most investors don’t beat the market… but would you invest in a REIT ETF?

That is true, most people can’t beat the market.

However, as mentioned before, ETFs have come a long way. Today, there are many variations of ETFs. Would holding a REIT ETF beat the market?

Like just take the example of NikkoAM-Straits Trading Asia Ex-Japan REIT ETF. It is incepted in March 2017, so it does not tell us much if we compare it to the S&P500 or even the STI Index.

But just for the sake of curiosity (see below):

The NikkoAM-Straits Trading Asia Ex-Japan REIT ETF price performance is way below S&P500’s and in recent years its price trended below the STI Index’s price (probably because REITs in general are under pressure due to the rising interest rates).

And then again would a REIT ETF beat a small basket of REIT counters?

Again taking the example of NikkoAM-Straits Trading Asia Ex-Japan REIT ETF, the biggest component within this ETF is Link REIT followed by CapitaLand Integrated Commercial Trust and CapitaLand Ascendas REIT. See below for their share price performance.

Share price-wise, the REIT ETF unperformed CapitaLand Integrated Commercial Trust and CapitaLand Ascendas REIT. However, we should also consider dividend payouts.

I am not so sure about Link REIT, but I am sure many local retail dividend stock investors would probably have CapitaLand Integrated Commercial Trust and CapitaLand Ascendas REIT in their investment portfolios.

So let’s say you sold these two REITs and then invest in NikkoAM-Straits Trading Asia Ex-Japan REIT ETF at the end March 2017 (around the time of the REIT ETF inception) and held on until now.

From the end of March 2017 until now, the cumulative profit/loss of a S$1000 initial investment, inclusive of dividend payouts of holding these counters (but not considering reinvestment of the dividends into the same counters) are as per below.

You would have made more overall by investing in CapitaLand Integrated Commercial Trust and CapitaLand Ascendas REIT, as compared to NikkoAM-Straits Trading Asia Ex-Japan REIT ETF.

I mean we can be very detailed in our thinking, philosophical about our investment strategies, and sanguine when there are minor volatilities. However, when over a long period of time, as we see that underperformance continues, would we not second guess our initial thought process?
I understand not all of us go and tabulate the overall cumulative profits or losses, but over the years, as you look at the share price underperformance, you would probably start having some self-doubts.

Then you think back about some Youtuber influencer saying “I made X million, did you? Anyone can make money in this type of market, only donkeys don’t”…

Or you think back about what you really know about the index methodology… and what you know (or actually do not know). As mentioned by Kyith in his post, “Access to risk and returns that are outside of your usual accessibility. If the REITs in a certain region perform better than Singapore REITs, you have access to that region.” Perhaps some of the components are really shitty REITs dragging down the ETF performance – so well this ‘outside of your usual accessibility’ is kind of double-edged. No issue when all things are going smoothly, but no control when things are not going smoothly. Can’t individually manage (good and bad).

But the fact is, in investing you can be wrong and still make money in the short to mid-term period… So what is right or wrong? Should you sell, buy or hold?

“Everyone has a plan until they get punched in the mouth.” Mike Tyson

Now, (having vested for the past 5 years or thinking about investing now for the medium to long term) would you have the conviction to hold on to the ETF for another say 5 years or 10 years?

In gist

Investing can be simple or hard, and it is also personal. So yeah…these are just some of my thoughts. Let me know your comments if any.

Thank you for reading.


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2 Responses to The dividend income retirement mindset is imperfect, but would I invest in a REIT ETF?

  1. Kyith says:

    I find it weird. I thought you are going to make a comment on the post about shifts away from the dividend retirement income mindset. But majority of the post is on the REIT ETF post.


  2. apenquotes says:

    That topic is too broad.
    It is good that you point out the flaws of this mindset. As I mentioned I did not disagree.

    Then the question becomes what is the alternative?

    In the ‘first’ post you talked about these REIT ETFs and the lady who is perhaps not that savvy with investing and how you presented the data to her. What I find lacking like what Der Shing mentioned in FB is the lack of conviction. And as mentioned, the fees that will slowly chip away the amount.

    I think that is an important first step.
    If one does not hold or is unwilling to commit long term; esp through bad times, the question of withdrawal rate will then be secondary.
    Yes shift… but shift to?


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