Welcome to the Weekly SUMmary - 06/25/2021
What are REITs? What are MLPs?
A client recently once asked me if I’d heard anything about Church Bonds. I had to dig some, but my understanding is that they are private investments in a group of entities and provide a return on equity during the length of investment or potential lump sum payment for the growth of the investment upon eventual sale. The reason for explaining this is it appears to be similar to other investment structures in that they have a team or investment company running the product for a profit. These products are explained below. Some other investments focus on Real Estate, the Energy/Natural Resources/Oil and Gas industry or have no specific focus. They can be traded on open exchanges or privately. Let’s take a look at a few of these.
“What are REITs?
Real estate investment trusts (“REITs”) allow individuals to invest in large-scale, income-producing real estate. A REIT is a company that owns and typically operates income-producing real estate or related assets. These may include office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses, and mortgages or loans. Unlike other real estate companies, a REIT does not develop real estate properties to resell them. Instead, a REIT buys and develops properties primarily to operate them as part of its own investment portfolio.”1
“What are Master Limited Partnerships?
Generally, Master Limited Partnerships (MLPs) are exchange-traded investments that are focused on exploration, development, mining, processing, or transportation of minerals or natural resources. MLPs hold cash-generating assets such as oil and gas properties or pipelines. MLPs have certain characteristics that can make them attractive to some investors, including partnership tax consequences, limited liability to investors for the MLP’s debts, and anticipated consistent distributions of cash.”2
The common theme among all of these investments is that one will have to dig a bit to find the information about the underlying investment. Whether they are referred to as Prospectus or not, all investments should have significant documentation that will assist in gaining the knowledge needed to make the decision about investing.
I will offer a couple of words of caution related to these types of investments. The investments on exchanges may be registered with regulating bodies (Securities and Exchange Commission), but the investor should do their homework relating to all investments. Those that are not listed on a public exchange have not been approved for mass sale and therefore require MUCH more scrutiny from the investor.
As the above investments are structured similarly to ETFs and Mutual funds let’s take a look at their structures.
Exchange Traded Funds (ETFs) are typically created by a large investment firm and there is a process created to choose investments within (often referred to as algorithm or set of algorithms). They may be reviewed and adjusted/adapted at times dictated by the prospectus created for this investment. There will be a charge/expense for this process and investment. Ultimately the goal of the large investment firm is to make a profit on this process and fund.
.05% or .0005 of 1 billion dollars or $1,000,000,000 is $500,000
Not bad for creating a couple of algorithms and reviewing annually.
Actively managed Mutual Funds are similar to ETFs, but have a physical team of actual people researching, analyzing, reviewing all of the investments within their fund on a regular basis. This could be constantly or sporadically dictated by the prospectus depending on the level of activity within the fund. Again, the ultimate goal of the investment firm is to be profitable, so there is a charge/expense for this system/process. Depending on the level of activity in the fund, the charges can be wide ranging.
1% or .01 of 1 billion dollars or $1,000,000,000 is $10,000,000
Let’s say there are 5 people on the investment team, each making an average of $300,000. The firm generates $8,500,0000 on this process. Bear in mind that there may be exorbitant travel costs related to visits to vet companies, look at financials, and myriad other expenses (computers, software [some financial systems cost 10s of thousands of dollars per license, annually], other equipment)
My previous blog on these investments can be found here: https://www.sumfsg.com/blog/mutual-funds-vs-exchange-traded-funds
The point is that you can invest in commodities, etc. but these investments have complex structures and it is important to do your research or work with a professional.. When you invest in these funds you are paying, in some way, for a service. The cost may be difficult to understand. I am always interested to learn about investments and would be happy to assist in your understanding if you would like to meet. In the meantime...
Do SUMthing smart with your money.