Investing in Canadian Real Estate: Stable Returns and Long-Term Growth

Canadian REIT ETFs can offer a great mix of income, growth, and exposure to real estate at a low cost.

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When investors think of Canadian real estate, they often think of rental properties, mortgages, and renovations, but in reality the sector is much broader than that. There are ample opportunities in adjacent areas like commercial, retail, industrial, and even real estate services.

For many investors, gaining exposure to these areas means buying real estate investment trusts, or REITs. However, picking the right REIT is hard, much less figuring out enough buys to create a diversified portfolio. If that’s an issue you struggle with, I have a solution for you.

Enter the REIT exchange-traded fund, or ETF, which can provide a potent combination income generation and capital appreciation, while mitigating some of the common hurdles, like liquidity issues. Here are my three picks for today.

The Vanguard option

Vanguard FTSE Canadian Capped REIT Index ETF (TSX:VRE) is a great pick for beginners who favour low fees above all. This ETF charges a relatively low expense ratio of 0.39%, which is considered competitive in the Canadian REIT ETF space.

VRE tracks the FTSE Canada All Cap Real Estate Capped 25% Index, which indexes a portfolio of 17 large-, mid-, and small-cap retail, residential, industrial, office, healthcare, and diversified REITs, along with real estate service companies.

Currently, VRE is sporting a 12-month trailing yield of 4.10%, which is what an investor holding the ETF over the last year would have received in terms of dividends. Another benefit of VRE is its monthly distribution schedule.

The iShares option

An alternative to VRE is iShares S&P/TSX Capped REIT Index ETF (TSX:XRE). This ETF tracks the S&P/TSX Capped REIT Index, which unlike the index used by VRE excludes real estate service companies.

Therefore, if you’re looking for pure-play REIT exposure, XRE might be a better pick over VRE. However, do note that this ETF does charge a higher expense ratio of 0.61%, which works out to around $61 in annual fees for a $10,000 investment.

Currently, XRE sports a 12-month trailing yield of 4.83%. iShares is calculating a distribution yield of 4.17%, which is projected annual yield of the most recent monthly dividend remained consistent moving forward.

The BMO option

My personal favourite Canadian REIT ETF is BMO Equal Weight REITs Index ETF (TSX:ZRE) due to its unique strategy. Unlike VRE or XRE, ZRE holds 22 REITs in equal allocations, potentially increasing diversification.

Both VRE and XRE use market-cap weighted indexes, where larger REITs are assigned a greater weighting. In practice, this can lead to high concentration among a handful of REITs, which can increase risk.

ZRE is also projecting a higher forward annualized distribution yield of 4.94% at this time. In terms of fees, it charges the same 0.61% expense ratio as XRE. Either way, any of these three REIT ETFs will provide good Canadian real estate exposure.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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