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Proof Points - GQRE

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FlexShares Global Quality Real Estate Index Fund

Diversification & Potential Income In A Multi-Factor Approach

Diversification & Potential Income In A Multi-Factor Approach

Portfolio Diversification

Investors seeking income and portfolio diversification may benefit from real estate investments. Our analysis suggests that global real estate has historically benefited from equity, credit and interest rate risk premiums2, while providing an alternative source of income that may be attractive in a low interest rate environment. Furthermore, according to Bloomberg, global real estate has been less volatile than US real estate, largely avoiding volatility spikes that have occurred over the last 15 years3.

In the chart below, our analysis suggests that by adding a 10% allocation funded from the equity portion of a hypothetical standard 60/40 portfolio4 into Northern Trust Global Quality Real Estate Index (NTGQRENTR), the resulting effect from 1 December 2013 - 1 July 2019 has been to reduce the overall portfolio exposure to U.S. equity market beta by an average of 4.7%.

Adding NTGQRENTR to a 60:40 Portfolio and 60-Month Rolling Exposure to Market Beta

Unique Multi-Factor Approach

Utilizing 50 years of general market data for global real estate markets, FlexShares developed what we believe is a unique multi-factor approach. Applying the Northern Trust Quality factor analysis, we assess the financial health of each global real estate company and rank them based on their management expertise, profitability and cash flow. We then combine this Quality score with the Value and Momentum factors to target what our analysis suggests are undervalued real estate securities which have exhibited positive momentum relative to their peers. We then utilize an internal optimization process to balance the fund’s exposure to the Quality, Value and Momentum factors. The result over the past five years has been enhanced risk-adjusted returns as measured by the Sharpe Ratio5.

Sharpe Ratio

Alternative Source of Income

Global real estate may provide an alternative source of income to investors searching for yield in a low interest rate environment. Historically, our analysis suggests that dividend payments distributed by real estate investment trusts (REITs) have been attractive relative to equity dividends and fixed income coupons. The 30-day SEC yield, as of 30 September 2019, offered by the FlexShares Global Quality Real Estate Index Fund (GQRE), compares favorably to the yields offered by two widely used equity and fixed income benchmarks – the S&P500 and the generic US 10-year maturing Treasury bond.

Yields as of 31 August 2019 and  GQRE Performance as of Sept. 30, 2019


1Beta is a measure of the volatility or risk, of a security or a portfolio in comparison to the market as a whole.
2Risk premiums - equity, credit and interest rate - refers to the excess return that investing in a particular market provides over the risk-free rate. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time. The excess return compensates investors for taking on the relatively higher risk of investing in that market.
3Source: Bloomberg. Comparison of the price volatility of FTSE EPRA Nareit Developed ex US Index versus FTSE EPRA/NAREIT United States Index during the time frame 31 March 2006 –30 September 2019.
4In this example, a standard 60/40 portfolio represents an investor investing 60% of their assets in the S&P 500 equity index and the other 40% in the Bloomberg Barclays US Aggregate index.
5The Sharpe Ratio is a measure of return that is often used to compare the performance of investments by making an adjustment for the level of risk.


FIND OUT MORE

The FlexShares approach to investing is, first and foremost, investor-centric and goal oriented. We pride ourselves on our commitment to developing products that are designed to meet real-world objectives for both institutional and individual investors. If you would like to discuss the attributes of any of the ETFs discussed in this report in greater depth or find out more about the index methodology behind them please don’t hesitate to call us at 1-855-FlexETF (1-855-353-9383).

FlexShares Global Quality Real Estate Index Fund (GQRE) is passively managed and uses a representative sampling strategy to track its underlying index. Use of a representative sampling strategy creates tracking risk where the Fund’s performance could vary substantially from the performance of the underlying index along with the risk of high portfolio turnover. It is subject to real estate sector risk in addition to the general risk of the stock market. Investments in foreign market securities involve certain risks such as currency volatility, political and social instability and reduced market liquidity. To the extent that the Fund invests in Emerging markets, those investments may be subject to increased price volatility and may be more susceptible to adverse economic, market, political or regulatory occurrences affecting that country, market, industry, sector or asset class. Investing in securities of real estate companies will make the Fund more susceptible to risks associated with the ownership of real estate and with the real estate industry in general, as well as risks that relate specifically to the way in which real estate companies are organized and operated. Real estate companies may have lower trading volumes and may be subject to more abrupt or erratic price movements than the overall securities markets. The value of real estate securities may underperform other sectors of the economy or broader equity markets. To the extent that the Fund concentrates its investments in the real estate sector, it may be subject to greater risk of loss than if it were diversified across different industry sectors. The Fund is also subject to the risk that its investments will be affected by factors that impact REITs and the real estate sector generally. Investing in REITs involves certain unique risks in addition to those risks associated with investing in the real estate industry in general. REITs whose underlying properties are concentrated in a particular industry or geographic region are also subject to risks affecting such industries and regions. By investing in REITs through the Fund, a shareholder will bear proportionate expenses of the REITs in addition to expenses of the Fund.