ETF: The new CoreShares Property ETF

Does anything sound more appealing to an ETF investor than dividend income that covers your living expenses?

The problem with this strategy is that dividends aren’t reliable. It’s up to the management of a listed company to determine whether or not they want to share profits in a given year. Predicting whether you’ll receive a dividend and what exactly the yield would be is practically impossible.

Property offers a solution to this problem, since real estate investment trusts (REITs) are required by law to pay the majority of their income as dividends to shareholders. CoreShares recently amalgamated their two existing property ETFs and added a bit of sparkle to make an income-focused property ETF.

The CoreShares SA Property Income ETF (CSPROP) includes all property shares on the JSE for a total of 26 companies. The higher diversification as a result of a higher number of companies to invest in is not the only way this ETF is greater than the sum of its parts.

The focus of this ETF is income. However, unlike other yield-focused property ETFs, this one looks at what really happened in the past, as opposed to what might happen in the future. The three-year average yield of all the property companies listed on the JSE is used in addition to market capitalisation to determine the weight of each company in the index. This strategy ensures that 24 of the 26 companies contribute to the performance of the overall ETF. The biggest investment is only 6%, even though this is not an equally-weighted index.

Tip: Simon Brown recently interviewed Chris Rule from CoreShares about this product. Listen here.

Since an unusually high yield could be a result of a crumbling share price, the ETF also filters out companies whose yields exceed the average by 50%.

This amalgamation reduces the number of property ETFs to choose from. However, greater diversification, more shares driving the performance of the ETF and focus on income hopefully make for a more positive investment experience for beleaguered property investors.

What does this mean for investors in the CoreShares Proptrax Ten (PTXTEN) and CoreShares Proptrax SAPY (PTXSPY)? You may have noticed those two have disappeared from your investment portfolio. The magical broker fairies will drop the CSPROP into their place in your investment portfolio with no action required on your part.

Does this mean this ETF is the solution to your investment income needs? Sadly, no.

Income from property investments doesn’t qualify for dividend withholding tax, since it’s technically not dividends. Instead, this income gets added to your annual income and taxed at your marginal rate. For most of us, that’s far higher than 20%.

It’s a good idea to buy this product in your tax-free investment account and Regulation 28 RA product before adding it to your ordinary discretionary portfolio.