New Property Fund Meets Distressed Market

IYR and RWR, in contrast, have about 80 holdings each.

One advantage of an actively managed approach is the Invesco team will be able to avoid areas of the market that have been among the hardest hit from the credit crunch. "PSR is focused on commercial real estate and not single-family housing," said Rodriguez. "While tenant demand may be lagging, commercial property markets are entering this slowdown with relatively contained levels of new construction. Unlike previous commercial property cycles, we are not seeing massive overbuilding."

Rodriguez acknowledges that commercial REITs may be facing a tough environment, but he believes that many will pull through. "In this environment, vacancy rates are likely to increase over the next two years," he said. "Our expectation is that for better managed companies and better positioned portfolios, these increases in vacancy should be manageable."

Making the cut

Because PSR will be actively managed, it probably will have a higher turnover rate than the 5% to 15% of IYR or RWR. "It wouldn't be impossible for the fund to experience annualized turnover rates in the 50% to 125% range," said Rodriguez. "Keep in mind that the ETF structure should allow most of this turnover to occur through in-kinding of securities, which shouldn't generate a taxable event."

IYR and RWR have dividend yields of close to 7%, which may not be sustainable, given falling revenue and profits.

"Any potential dividend cuts are likely to be manageable," said Rodriguez. "Dividend yields for U.S. REITs average 7.5%. Those yields coupled with share prices implying value of the underlying commercial properties below replacement cost give us several positive reasons to launch PSR at this time."