I like to play mega-trends in non-obvious, second-order effect ways as experience has taught me that they tend to lead to more inefficient opportunities in the markets. The growth of e-commerce is one example of a mega-trend. I identify the NetLease Corporate Real Estate ETF (NYSEARCA:NETL) as one option to play this trend.
Warehouse supply constraints are leading to favorable pricing and low-vacancy dynamics for NETL’s industrial tenants, which has quickly grown to become its largest tenant exposure. On the other hand, in retail, which makes up NETL’s second-largest tenant segment, the rent environment remains tepid due to a more balanced market. I adopt a hold as I wait for both these engines to fire along with technical triggers.
NETLease ETF Composition
The industrial, retail and restaurant sectors make up 46.1% of the overall exposure. Industrial tenants lease space for storage warehouses in logistical operations. In retail, leases include customer-facing stores and outlets, as does that of the entertainment sector.
Industrial has the largest weight with 21.5%, making its fundamental drivers important to analyze. Considering that the entire ETF has only 22 holdings, I believe the top 5 sector weight of 60.7% is well diversified.
It is unsurprising to see Texas top the list with an out-sized weight of 9.1%. Texas ranks 2nd in manufacturing-heavy states in the US, with about 1.2 million manufacturing jobs and 20,000 manufacturing companies. Although, considering that California ranks first in the manufacturing-heavy states list, I am a little surprised by its lower position in the states mix.
Top 10 Holdings
The top 10 holdings include Realty Income (O), W.P. Carey (WPC), National Retail Properties (NNN), Stag Industrial (STAG), VICI Properties (VICI), Getty Realty (GTY), Agree Realty (ADC), Essential Properties (EPRT), Gladstone Commercial (GOOD) and Spirit Realty Capital (SRC).
I have never seen such a mix split before. NETL curiously has roughly evenly weighted top 5 holdings and roughly evenly weighted top 6-10 holdings. Within the top 10 holdings, retail makes up 47% of the overall mix, suggesting that industrial weights may be held across a greater number of REITs outside the top 10.
My view on NETL is composed of 3 parts:
- Rising e-commerce sales is a mega-trend tailwind
- Shortage of space boosts industrial space demand