Performance Difference Drivers For Same-Sector ETFs

This article on provides a good summary of the question I’ve been looking at lately:

“The Vanguard REIT ETF (VNQ) has $34 billion in assets, significantly more than the $2.5 billion in the Real Estate Select Sector SPDR Fund (XLRE), which tracks the aforementioned S&P 500 sector index and the approximately $400 million Fidelity MSCI Real Estate Index ETF (FREL); however, VNQ’s 3.6% total return was below the gains for XLRE (8.6%) and FREL (6.8%).” Source: Vanguard REIT ETF Getting Makeover

How can these newcomers outperform the old beast? Probably because they track different indices, but they all supposed to track the Real Estate sector, right?

To understand the performance difference on must look under the hood, a.k.a. look at the holdings of each ETF. It is normally enough to check the top 10 or 20 stocks by weight to find the answer.

Source: Bloomberg

What’s striking is that VNQ has zero weight for American Tower (AMT) and Crown Castle International (CCI), two cell tower REITs. What’s more, the fund XLRE seems to be more concentrated in these names than the rest.

So our hypothesis now is that probably these two stocks have done better than the rest to cause XLRE and the two other to outperform VNQ this year. Let’s see if it is true!

These are the daily charts of the two stocks, with the lower panel depicting the relative performance of each stock to the VNQ etf:

Source: Bloomberg

Source: Bloomberg

The two have been massively outperforming the rest of the sector (represented here by the VNQ etf) since January, as can be seen by the rising red line in the lower panel. The price broke out of a post-election retracement consolidation range at the same time as the relative performance line broke above the descending trendline.

In light of this, we can easily explain why XLRE (and the two other ETFs) has been trailing VNQ since the beginning of September! Each of them has retraced some of its gains after breaking out to all time highs in August.

Source: Bloomberg

So in terms of fund selection, it comes down to whether these two will continue outperforming their peers or not. At least until the benchmark change in 2018….

Disclosure: We are long VNQ.