A first-of-its-kind exchange-traded fund focused on net-lease real estate investment trusts launched on Friday, offering investors access to an often overlooked—yet growing—slice of the REIT market.

Companies within the NETLease Corporate Real Estate ETF (NETL) own portfolios of properties mainly leased to single corporate tenants under net leases. A net lease is an agreement where the tenant pays both the rent and most—and in some cases, all—of the property expenses including property taxes, insurance and maintenance. That’s known as a triple net lease

Sounds like a financial and operational hassle for a tenant, but a triple net lease generally means a lower monthly rent than a gross lease agreement. And some companies are willing to pay the expenses associated with their properties rather have their capital tied up in real estate. (That said, they’re on the hook if the pipes burst.)

“There has been a huge paradigm shift from the past when operating companies tended to want to own their real estate,” says Alexi Panagiotakopoulos, co-founder and partner of Fundamental Income, the Phoenix-based outfit that designed the NETL fund’s underlying index. “Increasingly, companies realized it’s too expensive to buy their real estate and leave that capital static, and it’s too much distraction from their operations.”

As such, he adds, many corporations would rather have REITs hold the property so they can use their money for business purposes.

The idea seems to catching on. Panagiotakopoulos says there were only 11 publicly traded net-lease REITs with roughly $19 billion in gross assets in 2008; now there are 24 publicly traded net-lease REITs with about $140 billion in gross assets.

And these companies comprise the modified market cap-weighted index for the NETLease Corporate Real Estate ETF, which was launched by Exchange Traded Concepts LLC, a white-label firm that helps investment advisors and money managers turn their investment ideas into exchange-traded products.

The 24 companies control more than 23,300 properties with a weighted average occupancy rate of 98.8 percent. The weighted average remaining lease term is nearly 11 years.

According to Panagiotakopoulos, the NETL fund’s index offers exposure to all 50 states, with no more than 10 percent exposure to any one state and no more than 20 percent exposure to any one tenant industry. The top tenant industries by weight are industrial; retail; restaurants; hotel, gaming and leisure; and convenience stores.

In addition, the largest single tenant exposure is 3.2 percent. “We’ve tried to spread the diversity among all of these REITs,” Panagiotakopoulos says.

The fund's expense ratio is 0.60 percent.

Yield Play, Price Appreciation . . . And Credit Risk

Part of the appeal of net-lease REITs, according to fund literature, is that they don’t have exposure to multi-tenant properties that typically have significant capital expenditures and operating expense obligations for property owners such as property taxes, insurance and maintenance.

Instead, net-lease REITs get consistent rental income without the responsibility for managing the property or paying expenses on it. And lease terms of 10 years or more provide predictable income.

For REITs, that income translates into sizable yields that appeal to income investors, which is the target market for the NETL fund.

“Historically, REITs in the net-lease space have delivered yields in the range of 5-plus percent, with the opportunity for capital appreciation, Panagiotakopoulos says.

Looking at the NETL fund’s top three holdings, Vereit Inc. sports a forward dividend yield of 6.5 percent, W.P. Carey Inc. is at 5.3 percent and Realty Income Corp. (with the intriguing ticker symbol “O”) is on the lower end at 3.7 percent, according to Morningstar.

Of course, all REITs can be impacted by the vicissitudes of the economy.

“It’s like with any REIT, if a company goes bankrupt and stops paying rent the property becomes vacant and there’s no income from the property, which means less money for the REIT to pay a dividend,” Panagiotakopoulos says.

In the case of net-lease REITS, he notes that corporate credit is the biggest potential risk. Sixty-three percent of the top 100 tenants (based on rental revenue) of the publicly traded net-lease REITS have debt rated by national rating agencies. Of that group, a little more than half have debt that’s non-investment grade, which means it's lower on the bond spectrum.

“You have exposure to the corporation paying the rent, so it’s not 100 percent certain,” Panagiotakopoulos says. “This isn’t senior secured debt, but that’s also why there’s a yield component. We’ve democratized the market’s ability to invest in a broad array of credits.”

He posits that the net-lease structure provides some stability during economic downturns.

“What makes net lease interesting is because they have 11-year leases, unless a company goes bankrupt or out of business, just because the S&P 500 is down 500 points doesn’t mean Starbucks or Taco Bell isn’t paying their rent,” Panagiotakopoulos says.