Arizona-based investment firm Fundamental Income has become the latest entrant to the US ETF market with the launch of the NETLease Corporate Real Estate ETF (NETL US) on NYSE Arca.
Net leases involve the tenant being liable for the majority of property expenses such as taxes, insurance, and repairs.
Brought to market in partnership with white-label platform Exchange Traded Concepts, the fund provides pure-play exposure to Real Estate Investment Trusts (REITs) focused on the ‘Net Lease’ segment of the property market.
Net Lease REITs tend to provide sustainable income with predictable growth by leasing properties to single tenants under net leases wherein the tenants are responsible for the payment of most, if not all, operating expenses including property taxes, insurance, and maintenance.
These REITs act more as capital providers to operating businesses and generate their returns from contractual, tenant lease payments rather than property appreciation.
The underlying leases generally have terms that are ten years or longer, predetermined rental rate increases, and minimal landlord responsibilities.
The fund may appeal to income-seeking investors due to the rule that REITs must distribute at least 90% of their taxable income to shareholders annually in the form of dividends.
The ETF tracks the in-house Fundamental Income Net Lease Real Estate Index which encompasses a variety of US-listed REITs that generate at least 85% of their income from leasing properties through long-term contractual leases.
REITs must have a minimum market capitalization of $200 million and a free float of 20% to be eligible for the index.
According to Fundamental Income, Net Lease REITs included in the index will exhibit robust management processes including strong underwriting and due diligence methodologies that target credit-worthy tenants and properties that are integral to the tenants’ businesses.
The index does not include exposure to multi-tenant malls, traditional multi-tenant office buildings, and multi-family owners, all of whom have significant capital expenditures and operating expense obligations.
The index currently consists of 24 REITs and is weighted by market cap, subject to individual REIT limits. Reconstitution and rebalancing occur on a quarterly basis.
As of the end of 2018, industrial and retail industries led the index’s exposures with weights of 19.5% and 12.9%, respectively, followed by restaurants (9.7%), and hotel, gaming, and leisure (9.0%).
The largest constituents were Realty Income (8.4%), National Retail Properties (8.3%), WP Carey (8.2%), Store Capital (8.1%), and VEREIT (8.0%).
The fund comes with an expense ratio of 0.60%.
Chris Burbach, co-Founder and Partner of Fundamental Income, said, “We started Fundamental Income with a simple view that investments with cash flows built upon identifiable underlying fundamentals that are stable and predictable should be worth more than those without a clear foundation or less certainty.
“Net Lease REITs have the potential to provide investment income and capital preservation, in a market searching for both, which is why we are excited to partner with Exchange Traded Concepts. We believe this ETF offers investors broad exposure to the tangible US economy through the underlying predictable rents of NETL. The time has come for investors to shift their focus from property appearances to results and for Net Lease real estate to stand on its own.”
J. Garrett Stevens, CEO of Exchange Traded Concepts, added, “We are thrilled to be working with the Fundamental Income team to bring this timely and innovative fund to market. This fund tracks the Net Lease real estate sector which exemplifies consistent and predictable cash flows that Net Lease REITs derive from a diverse portfolio of corporate-leased properties.”