Many analysts are expecting another interest rate cut from the Reserve Bank of Australia today. Could the VanEck Vectors Australian Property ETF (ASX: MVA) beat falling interest rates?
What Are ETFs?
Exchange-traded funds, or ASX ETFs, are investment funds that are listed on a stock exchange and provide exposure to a range of shares or assets with one purchase.
This Rask Finance video explains ETFs:
Why Property?
Before looking at the specifics of the MVA ETF, here’s a quick overview of how property can benefit from falling interest rates…
Interest rates have several different effects on property prices because they influence mortgage rates, supply and demand, the flow of capital, and the required rate of return on investment.
Lower interest rates make it cheaper to invest in property which can increase demand. If you use an income-based approach to value property, then interest rate declines also increase the value by lowering the required rate of return and the discount rate.
VanEck Vectors Property MVA ETF
The VanEck Vectors Australian Property ETF is one such ETF that could benefit from falling interest rates.
The MVA Property ETF has 12 holdings as well as a small cash allocation and aims to track the performance of the MVIS Australia A-REITs Index. All of the 12 holdings are ASX-listed real estate investment trusts, or REITs.
The REITs included are the largest on the ASX, including Goodman Group (ASX: GMG), Stockland Corporation Ltd (ASX: SGP) and Charter Hall Group (ASX: CHC).
Over the last 12 months, the MVA Property ETF has benefited greatly from two RBA rate cuts, returning 26.79% including dividends. Over a five-year period, the ETF has returned 14.64% per year.
Dividends are paid semi-annually, typically in July and January, and the ETF currently offers a trailing dividend yield of 3.93%, 7% franked.
Fees And Risks Of MVA
The VanEck Vectors Property ETF is one of the cheapest ASX property ETFs, with a management fee of 0.35% per year.
While it may benefit from interest rate cuts, the ETF would also be heavily impacted by a rate rise, so interest rate risk is a concern. It is also a very concentrated ETF, with only 12 holdings all in the same sector. This means I would consider this ETF a tactical ETF, rather than something that would be used as the core of a portfolio.
My Take
MVA is an interesting ETF and one that has the potential to show high returns over the coming months and years. However, while data shows house prices may be on the rise again, some commentators are warning that a crash is still coming. Either way, I would only be allocating a small portion of a portfolio to this tactical ETF.
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Disclosure: At the time of writing, Max does not have a financial interest in any of the companies mentioned.
