The Bank of Canada just cut its policy rate by 0.25%, bringing it down to 2.5%. That’s a relief for variable-rate mortgage holders and also welcome news for bond investors still nursing losses from 2022.
On the flipside, it’s less positive for savers relying on guaranteed investment certificates (GICs) or high-yield savings accounts, since returns on those will fall (though for GICs, only new issues are affected).
But lower rates aren’t bad news for everyone. Two sectors of the Canadian market are especially poised to benefit: utilities and real estate investment trusts (REITs). Here’s why, along with two exchange-traded fund (ETF) picks I like for betting on them.
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Why utilities and REITs benefit
Both utilities and REITs rely heavily on debt to grow. Utilities borrow to build and maintain power generation or transmission infrastructure, while REITs raise capital to acquire and develop real estate properties.
In either case, the goal in both cases is to spend upfront, then collect a steady stream of cash flow over decades to support above-average dividends. When debt is cheaper – either because new borrowing costs less or management refinances existing debt at lower rates – the hurdle rate for projects comes down.
That’s critical, because organic growth for utilities is limited to expanding service areas or adding connections, which are constrained by population growth. REITs face similar limits since occupancy rates and rent increases only move so far; to expand meaningfully, they need to buy or develop more properties. Lower rates make those growth avenues much more feasible.
There’s also a psychological angle. When low-risk cash alternatives no longer yield 4% or more, the steady dividends of utilities and REITs look more attractive. Unlike cash products, these sectors also offer the potential for capital appreciation as earnings grow.
The ETFs to buy
For sector bets, I prefer to avoid market-cap-weighted ETFs. Those products are often too top-heavy, with just two or three dominant companies driving performance. Instead, I gravitate toward equal-weight strategies that spread exposure more evenly across holdings.
Two I like are the BMO Equal Weight Utilities Index ETF (TSX:ZUT) and the BMO Equal Weight REITs Index ETF (TSX:ZRE).
Both charge a 0.6% expense ratio and do exactly what their names suggest: equal weight their holdings. This creates a systematic “buy low, sell high” effect as smaller holdings get topped up and larger ones trimmed during rebalancing, helping reduce concentration risk.
They’re also solid income plays. ZUT currently yields about 3.3%, while ZRE yields a higher 3.8%. ZUT’s distributions are mostly eligible dividends, making it more tax-efficient than ZRE, whose payouts are treated as ordinary income.
