ETRACS, the fund brand of UBS, has already made a name for itself in rolling out high yield leveraged products. To carry on its success story, the issuer recently launched a new leveraged ETF targeting the U.S. REIT sector. The fund trades in the name of ETRACS Monthly Pay 2xLeveraged MSCI US REIT Index ETN (LRET - ETF report).  

LRET in Focus

This new note looks to offer investors two times monthly resetting exposure to the MSCI US REIT Index. The index consists of a portfolio of 140 high income-generating U.S. REIT securities and has high company-specific concentration risks.

The largest holding stock, Simon Property Group Inc. (SPG), forms roughly 8.5% of the portfolio. The second and third largest holdings, Public Storage and Health Care REIT Inc, have about 4.0% and 3.7% of the basket, respectively. The fund charges 85 bps in fees.

The product anticipates paying out roughly 7.45% in yield a year to investors, indicating its heavy focus on income. Investors should also note that the product is structured as an ETN which carries an associated risk of the issuer’s credit worthiness, though this should be a minor consideration.

How Does it Fit in a Portfolio?

This note could be an interesting choice for those seeking a play in the REIT ETF space. REITs offer outsized gains in a low rate environment. This is especially true as it is necessary for this space to distribute at least 90% of its annual taxable income to shareholders annually in the form of dividends (read: A Comprehensive Guide to REIT ETFs).

Thus, a low interest rate environment brightens the lure of high yields delivered by REITs. Even if rates rise at some point in the latter part of this year, a growing economy would duly back the space. So, a leveraged version of an REIT ETF could be a bonanza. After all, with the 10-year T-Bill (TYX) yet to reach the 2.50% level, LRET’s projected yield approaching 7.45% appears extremely lucrative.

This ETN may not be suitable for cost conscious investors though, as it charges a bit higher fee compared to other income plays out there. Plus, being a leveraged ETF, ideally meant for investors with a stomach for risks, the product might not see ample assets. So, paltry volume and higher trading costs could be botherations (read: IYR vs. VNQ: Real Estate ETFs Head-to-Head).  

ETF Competition

The leveraged real estate ETFs space is not teeming with products. The strongest contender might be Ultra Real Estate ETF (URE) which gives twice the exposure to the returns of the Dow Jones U.S. Real Estate Index. The fund charges 95 bps in fees and has amassed about $270.6 million in assets so far.

Investors would be interested to know that the space is presently headed by an UBS product only, namely ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN (MORL). The product charges much lower than LRET at 40 bps fees and has hoarded about $319 million. What makes it different from the latest UBS launch is that MORL focuses on mortgage REITs while LRET targets the broader sector (read: UBS Debuts Extremely High Yield Leveraged ETF).

Since UBS has already tasted success in rolling out similar-themed products, we do not expect LRET to face any hurdle in its journey in the ETF world. In short, LRET looks to be a fascinating development for the broad ETF industry as a whole.