Make Passive Income With Canada’s Top Real Estate ETFs

Canadians can make passive income by investing real estate ETFs paying monthly dividends and managed by established fund managers.

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Real estate investment trusts (REITs) are the next-best options for income-focused investors whose core holdings are dividend stocks. REITs trade like stocks with a focus on the real estate sector. These real estate stocks are also great alternatives to owning and managing physical properties.

However, Bank of Montreal and BlackRock introduced exchange-traded funds (ETFs) years ago. BMO Equal Weight REIT Index (TSX:ZRE) and iShares S&P/TSX Capped REIT Index ETF (TSX:XRE) are hybrid products specific to the real estate sector.

Portfolio managers BMO Global Asset Management and BlackRock, through their respective ETFs, offer low-cost exposure to different real estate sub-sectors, long-term capital growth, and healthy monthly payouts.

Both ETFs are 100% Canadian and suitable for dividend earners with medium-risk appetites. The dividend yields are nearly even at 5.58% for ZRE and 5.59% for ZRE. Your money can generate generous monthly passive-income streams from these top Canadian REIT ETFs.

Equal weight

BMO Equal Weight REIT Index replicates, to the extent possible, the performance of the Solactive Equal Weight Canada REIT Index (net of expenses). ZRE’s distinction is in the term “equal weight.” The fund invests and holds REITs in the same proportion as represented in the index, meaning it allocates a fixed weight for each security.

If you invest today, ZRE trades at $18.47 per share and the portfolio has 22 holdings. Retail REIT (38.25%) has the most significant representation, followed by the industrial (9.58%) and diversified (9.42%) sectors. Healthcare REITs have the least coverage, although Chartwell Retirement Residences is the top stock holding (5.41%).

Capital weight

The iShares S&P/TSX Capped REIT Index ETF is also a single fund with exposure to different types of REITs. It replicates the performance of the S&P/TSX Capped REIT Index, net of expenses. The difference with ZRE is that XRE is capital-weighted, which means the ETF uses a stock’s market price and outstanding shares to determine the percentage allocation of the fund.

Some investors prefer an equal-weight ETF over a capital-weight ETF. However, BlackRock is a top asset manager and is responsible for iShares ETFs. XRE was introduced on October 17, 2002, while ZRE came later on May 19, 2010.

XRE has fewer holdings (16) and trades at $14.19 per share. Retail (40.60%), multi-family residential (30.06%), and industrial (17.31%) REITs have the largest exposures. The top two stock holdings are Canadian Apartment Properties (16.61%) and RioCan (11.81%).

Established fund managers

The rapid rise in interest rates negatively impacted the real estate. Still, investors can spread the risk or have instant diversification investing in REIT ETFs because of the exposure to different real estate sub-sectors.

Canada’s housing market was red hot until inflation started rising in June 2021 before peaking at 8.1% one year later. Headline inflation in September 2023 is 3.8%. ZRE of BMO Global Asset Management and BlackRock’s XRE are established fund managers in the ETF space, although both are not immune from economic downturns.  

As of this writing, XRE is larger ($841.9 million) than ZRE ($498.7 million) in terms of net assets. The choice could boil down to the equal or capital weight methods, longevity or inception dates, and trading volume. Currently, XRE has more investors.

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 Christopher Liew 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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