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

Date18 March 2020
Published date18 March 2020
AuthorArvydas Jadevicius
Subject MatterReal estate & property,Property valuation & finance,Property management & built environment
Exchange-traded fund investing as
European open-end diversified
core equity real-estate funds
cash substitute
Arvydas Jadevicius
Independent Researcher, Amsterdam, The Netherlands
Purpose The 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/approach First, 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.
Findings The 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 implications Real 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/value The study adds additional evidence on the contested issue of blending private and public
real estate.
Keywords Europe, ETFs, Cash, Funds, ODCE, Substitutes
Paper type Conceptual paper
Cash is king or so does the adage goes. Although the origin of this quote is unknown, since the
ascent of money (Ferguson, 2008), cash (cabbage, dough, moolah or whatever you call it)
became a centerpiece of commerce. For investors, cash ensures liquidity. It also enables profit
to be made when investment opportunities arise especially in the falling markets.
However, Fiat money is expensive. Aside inflationary erosion that afflicts cash reserves
and the means required to manage it (Chakravorti, 2014), banks/custodians charge investors
for safeguarding their liquid assets. A typical Eurozone money market fund charges an
annual rate of 0.43 as at October 2019 (Morningstar, 2019).
For European open-end diversified core equity (ODCE) real-estate funds, liquidity is
directly priced into the market. Open-end funds are generally defined as infinite-life/ever
greenvehicles consisting of multiple investors that can enter or exit the vehicle on a periodic
basis, subject to contribution and/or redemption requests. Investors take equity ownership
position in a fund that maintains low borrowing levels and pursues multicountry/multisector
strategy acquiring stable income producing assets (NCREIF, 2019). As a rule, ODCE funds
allow their investors to redeem invested equity from the vehicle quarterly. However, this
The author would like to thank anonymous reviewer as well as Pei Lin Pan and Simon Huston for their
editorial that greatly improved this manuscript.
Disclaimer: This manuscript was prepared by the author in his personal capacity. All views and
opinions expressed in this manuscript are those of the author and should not be regarded as
representing the views or opinions of institution he represents.
The current issue and full text archive of this journal is available on Emerald Insight at:
Received 6 December 2019
Revised 18 December 2019
23 December 2019
Accepted 23 December 2019
Journal of Property Investment &
Vol. 38 No. 2, 2020
pp. 156-160
© Emerald Publishing Limited
DOI 10.1108/JPIF-12-2019-0147

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