The Tax-Free Savings Account (TFSA) is best used for assets that either grow aggressively or generate high income.
First, any capital gains earned inside a TFSA can be withdrawn completely tax free. That makes it an ideal place for long-term compounders. Second, if you own income-producing investments, you can either reinvest distributions to accelerate compounding or withdraw them to spend without paying tax.
That is why some exchange-traded funds (ETFs) are better suited for a TFSA than others. Real estate investment trusts, or REITs, are a good example. They tend to pay high yields generated from rental and lease income tied to physical properties. Outside of a TFSA, that income can be taxed heavily. Inside a TFSA, it stays entirely yours.
Here are two Canadian REIT ETFs that pay attractive monthly income and are well-suited for long-term TFSA investors.
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Market cap-weighted option
The iShares S&P/TSX Capped REIT Index ETF (TSX:XRE) tracks a benchmark of 16 Canadian REITs spanning retail, residential, office, industrial, and healthcare properties.
Because it is market cap-weighted, the largest REITs receive the biggest allocations. That means dominant players in the sector can carry significant influence in the portfolio, although individual holdings are capped at 25% to limit extreme concentration.
XRE currently offers an annualized trailing 12-month yield of about 4.7%. This figure reflects what investors would have received over the past year. Distributions are paid monthly, which aligns nicely with income-focused TFSA strategies.
The downside is cost. The management expense ratio is 0.61%, meaning a $10,000 investment would cost roughly $61 per year in fees. If you wanted to minimize fees, you could theoretically purchase the top REIT holdings directly.
The equal weight option
The BMO Equal Weight REITs Index ETF (TSX:ZRE) tracks the Solactive Equal Weight Canada REIT Index. ZRE holds 20 Canadian REITs across similar sectors as XRE.
The key difference is methodology. Instead of allocating more to the largest REITs, ZRE rebalances holdings so that each REIT sits at roughly 5%. That prevents one or two large companies from dominating the fund and systematically forces a buy-low, sell-high discipline during rebalancing periods.
ZRE currently offers an annualized distribution yield of about 4.6%. This figure is calculated by taking the most recent monthly distribution, multiplying it by 12, and dividing it by the current share price. It is forward looking and assumes no change in payouts.
The management expense ratio is 0.61%, similar to XRE. While that is not cheap, the equal weight structure is more difficult to replicate on your own. For that reason, some investors may find the fee more justifiable here.
