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

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.