Alright, let’s stir the pot a bit and talk about Swiss Real Estate ETFs. Over the past five years, their AUM have ballooned by nearly half a billion, thanks to the rise of robo-advisors.
What are Swiss Real Estate ETFs and what do they hold?
These ETFs aim to give you a slice of the Swiss real estate market by mirroring the performance of the SXI Real Estate Indices. They hold a “somewhat” diversified mix of open-end real estate funds. I say “somewhat” because half of the funds in the mix are managed by the same asset manager.
On the surface, everything looks peachy. These ETFs, along with most of the underlying funds, are traded daily on the SIX Swiss Exchange with decent volume. You can buy them as part of your ETF portfolio, enjoy “daily” liquidity, and expect “moderate” risk according to the Key Investor Information Document (KIID). Sit back and wait for the dividends to roll in.
But let’s dig a little deeper.
The underlying real estate funds invest in—you guessed it—real estate. We’re talking physical buildings across Switzerland, mainly residential properties (57% of the fund) and commercial buildings (29%).
Not the most liquid underlying right?
Just imagine for a second that a real estate crisis hits Switzerland. I know, it’s almost taboo to even suggest it—most experts act like it’s impossible. But bear with me.
What would happen if a significant number of investors suddenly wanted to cash out from both the ETF and the open-end funds? I mean, selling an entire building in Basel isn’t exactly a quick process.
Here’s a hint from the prospectus of one of the underlying funds:
“Due to the restricted liquidity of Swiss real estate market, there is the risk that a short-term sale of buildings, properties, or large-scale real estate portfolios may not be possible under unfavorable market conditions or may only be possible with price concessions.”
Ouch. No sales or price concessions? And what kind of concessions are we talking about? Well, a quick look at the funds’ premium to NAV gives you a rough idea of the extent in an ugly scenario. And those premiums these days are quite juicy, hovering around 30% for most funds. And let’s not forget that NAVs are pretty theoretical and these funds carry a bit of leverage.
“Concession” might be an understatement. And that’s at the fund level. The ETF is the second derivative.
If you invested in one of the open-end funds, you did so knowingly. Everything is laid out in the prospectus, and your advisors explained the risks to you.
But if you ended up there because your robo-advisor thought it was cool to have exposure to real estate through a supposedly liquid ETF, that’s a different story.
Don’t get me wrong. My point isn’t that Swiss Real Estate ETFs are necessarily bad products. It’s just that they’re often put in the wrong hands with the wrong narrative. Unfortunately, you usually only realize this when trouble comes knocking.