Should you pull the trigger on Claymore's ETFs?

LARRY MACDONALD
Special to The Globe and Mail
August 26, 2008

Canadians will now be able to buy homegrown exchange-traded funds (ETFs) that let them dip a toe into the pool of real estate and infrastructure assets across the world.

Claymore Investments Inc. is set to list two ETFs for trading on the Toronto Stock Exchange today: the Claymore Global Real Estate ETF and the Claymore Global Infrastructure ETF, the first of their kind in Canada.

Canadians could previously gain similar country and currency diversification in the ETF sphere only through comparable ETFs that trade in the United States. But those also expose investors to risks related to the fluctuating U.S. dollar and U.S. taxes.

Adrian Mastracci, a portfolio manager with KCM Wealth Management Inc., likes the two new Claymore ETFs. "I'm much in favour of allocating some cash to global real estate and infrastructure as part of a broadly diversified portfolio - say up to 10 per cent of the total portfolio," he explained. "Both areas are difficult to invest in as the choices are lacking. I'm looking forward to having two more selection possibilities to choose from."

As described by Claymore Investments chief executive officer Som Seif, the two new ETFs track "intelligent indexes." That is, the selection of companies for the index goes beyond the market capitalization and other requirements typical of standard indexes such as the S&P/TSX composite index.

Take the Claymore Global Real Estate ETF. It follows the Cohen & Steers Global Realty Majors index, which is composed of real estate investment trusts (REITs) screened and updated quarterly by "a deep and experienced team of investment professionals dedicated to global real estate securities," Mr. Seif said. Selection criteria include "strong management, strong market position, and sound capital structure."

The Claymore Global Infrastructure ETF tracks the MFC Global Infrastructure index, another "intelligent index."

Canadians may want to choose the Claymore ETFs to avoid the U.S. currency and tax risks. Also, the Claymore real estate ETF would seem to have better geographic coverage because it includes U.S. companies. And it has a heavy concentration in REITs, which pay high distributions and can be a good addition to the income part of a portfolio.

Canadians who are convinced the loonie will depreciate against the U.S. dollar may be tempted by the lower management expenses and higher yields on some of the U.S. ETFs. Liquidity, and hence prices, might be better too.

With relatively annual high management fees at 0.65 per cent, are the new Claymore ETFs worth the money?

Let's first look at the five rival global real estate ETFs trading in the United States. Here are three things to consider before buying the new Claymore real estate ETF.

Expenses and yield

Management fees for the U.S. real estate ETFs range from 0.48 to 0.6 per cent, while dividend yields range from 4.4 to 5.8 per cent, according to seekingalpha.com. Claymore says its new real estate ETF has a dividend yield of 4.41 per cent, so its expenses are high while its yield is at the low end of the range.

One of the U.S. ETFs, the Cohen & Steers Global Realty Major Fund - from the iShares family - tracks the same index as the Claymore real estate ETF, and its management fee is lower, at 0.55 per cent.

Diversification

The U.S.-domiciled ETFs, except for Cohen & Steers, avoid U.S. companies and concentrate on companies in Japan, Australia and Hong Kong. Most of the companies in the Claymore fund also are based in three countries - the United States (41 per cent), Australia (14 per cent), and Hong Kong (10.9 per cent).

The top firm in all of the global real estate ETFs is the Westfield Group, ranging from a 3.8-per-cent share in Claymore's offering to more than 9 per cent in one of the U.S. ETFs. Westfield Group is an Australian mall operator with about half of its properties in the United States.

Correlation

Real estate and infrastructure securities are said to have historically low correlations to stocks and bonds. So when stocks and bonds are up or down, real estate and infrastructure holdings may move in the opposite direction, reducing volatility in returns.

"Any sector ETF will have higher volatility than broadly-based ETFs," said John De Goey, an investment adviser with Burgeonvest Securities Ltd. "But if they are weakly correlated with the market, they can lower the overall volatility of a portfolio."

However, the U.S. real estate ETFs have recorded price declines of approximately 40 per cent since stock markets turned down in mid-2007. At this point, the appeal of global real estate ETFs seems to be more as value plays, because some are reporting market values below book values.

Here are three things to consider before buying the new infrastructure ETF, which will benefit from the need for new or upgraded roads, airports, schools and utilities.

Fees and yield

The new Claymore infrastructure ETF has two rivals in the U.S. Their management expense ratios are 0.48 and 0.6 per cent, versus Claymore's at 0.65 per cent. Their dividend yields are 1.6 and 1.9 per cent according to the companies' specification sheets, compared with the Claymore ETF dividend yield of 2.7 per cent.

Diversification

The Claymore ETF gives more weight to the United States (41 per cent) and Canada (8.6 per cent), while the two U.S. ETFs give less weight to these two countries and spread the difference over European countries.

Correlation

One of the U.S. infrastructure funds, the SPDR FTSE/Macquarie Global Infrastructure 100, is up about 5 per cent in price over the past year, which appears to confirm low correlation with the broader stock market. This might be explained by the 89-per-cent allocation to utilities.

The other U.S. infrastructure ETF, with only 40 per cent in utilities, is down 14 per cent since inception in November, 2007.

The Claymore investment guide does not specify a breakdown by industrial sector. But by extrapolating from the table of top 10 companies, the proportion of the weights assigned to utilities appears to be close to 40 per cent.

Two new ETF holdings
As of June 30, 2008
Global infrastructure index
E.ON AG: 5.50%
Hutchison Whampoa: 5.00%
SUEZ (France): 4.23%
Williams: 4.16%
Hong Kong & China Gas: 3.61%
Chicago Bridge & Iron: 3.55%
Keppel: 3.22%
Foster Wheeler: 3.10%
McDermott International: 3.04%
Progress Energy: 3.00%
Global real estate index
Westfield Group: 3.78%
U
nibail-Rodamco SA: 3.72% Simon Property Group: 3.63%
ProLogis: 3.50%
Mitsui Fudosan: 3.48%
Mitsubishi Estate: 3.37%
Sun Hung Kai Properties: 3.15%
Vornado Realty Trust: 2.96%
Land Securities: 2.85%
Boston Properties: 2.69%
SOURCE: CLAYMORE INVESTMENTS
This article first appeared in Globeinvestor.com/magazine.