Exchange-traded fund investing as European open-end diversified core equity real-estate funds' cash substitute

Abstract

PurposeThe study is set to explore a viability for substituting part of cash holdings within European open-end diversified core equity (ODCE) real-estate funds with listed real-estate exchange-traded fund (ETF) alternative. Academically, this research bridges a knowledge gap within private real-estate market research.Design/methodology/approachFirst, the study investigates the correlation between ODCE and ETFs to assess series interdependence. Next, the study generates a blended ODCE and ETF portfolio and examines its performance by quantifying a) the contribution to returns and b) the diversification benefits.FindingsThe findings suggest that a 1 percent spare cash allocation to an ETF increases ODCE fund returns by few bps although the diversification benefits are more nuanced.Practical implicationsReal estate and other investment vehicles are encouraged to review their cash-holding strategies. Real estate, infrastructure or private equity vehicles could designate a small proportion of available cash to asset class-specific ETFs. These cash substitutes are likely to increase returns and could strengthen diversification, although there are some caveats. For ESG-conscious investors, sustainable ETFs and associated passive conduits with strong responsible investment characteristics could provide cash replacement alternatives at the margin.Originality/valueThe study adds additional evidence on the contested issue of blending private and public real estate.