iShares S&P/TSX Capped REIT Index ETF (TSX:XRE): Why I Like this ETF Better Than a Rental Property

XRE is a great ETF for gaining exposure to the Canadian real estate sector.

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No matter what your investment objectives are, there’s likely an ETF out there for you. Whether you’re aiming for growth, seeking income, prioritizing safety, or looking to gain exposure to specific asset classes outside of the usual stocks and bonds, ETFs can provide a broad spectrum of opportunities.

Real estate is a sector that many investors are keen to get into, and yes, there are ETFs for that as well. A prime example in Canada is the iShares S&P/TSX Capped REIT Index ETF (TSX:XRE).

This ETF is among the most popular options for those looking to invest in Real Estate Investment Trusts (REITs) through a single, convenient vehicle. Here’s why I personally find XRE to be a more attractive option than owning a rental property.

It’s hands-off and accessible

Owning a rental property often sounds like a lucrative investment, but it comes with its fair share of challenges. First off, there’s the initial financial barrier: a substantial down payment and possibly a mortgage, not to mention the ongoing costs of maintenance, property taxes, and fees.

Then there’s the task of finding and managing tenants—selecting reliable ones, dealing with any delinquencies, and the potential nightmare of having to evict someone. The responsibilities can quickly turn what seemed like a passive investment into an active and stressful job.

In contrast, investing in XRE is remarkably straightforward and hands-off. All it requires is purchasing the ETF through any brokerage app, which can be done within a Registered Retirement Savings Plan (RRSP), a Tax-Free Savings Account (TFSA), or even the new First Home Savings Account (FHSA).

There’s no need to worry about the complexities of directly managing property; XRE provides exposure to a diversified portfolio of real estate investments with the simplicity of buying a stock. Plus, it offers the added benefit of paying out a monthly distribution, with a yield of 5.11% as of February 9, 2024.

It’s more diversified

Investing in a single rental property typically limits your exposure to the residential housing market. This narrow focus can be a significant drawback, as you’re missing out on the broader opportunities available within the real estate sector.

Your investment’s success is tied to the performance and demand within a single market segment, which can vary greatly depending on location, economic conditions, and other factors.

In contrast, XRE offers a more diversified approach to real estate investment. XRE currently holds a portfolio featuring 16 Canadian REITs that span across multiple areas of the real estate market.

This includes retail REITs at 39.64%, multi-family residential REITs at 31.19%, industrial REITs at 17.17%, diversified REITs at 5.16%, office REITs at 4.5%, and healthcare REITs at 1.87%.

This diversification across different types of real estate not only spreads out your investment risk but also opens up opportunities for growth in sectors you might miss by owning just a residential property.

For example, while the residential market might face a downturn, industrial or healthcare REITs could be experiencing growth, offsetting potential losses and stabilizing your returns.

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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