Investing in Canadian real estate investment trusts (REITs) can be a great way of gaining real estate exposure in your investment portfolio without the hassle of a rental property. Shares of REITs trade on exchanges like stocks and often payout monthly income. Investing in REITs can be a great way of implementing a dividend growth investing strategy
However, buying and holding enough REITs to stay diversified can be difficult. An alternative here is an exchange-traded fund (ETF) that holds a portfolio of REITs. Investing in a REIT ETF can be a hands-off way of picking some of the top REITs on the market.
If you’re interested in investing in Canadian REIT ETFs, we’ll break down everything you need to know.
What is a REIT ETF?
A real estate investment trust (REIT) ETF is an open-ended fund that holds a “basket” of different REITs. When investors buy shares of the REIT ETF, they receive a proportional “slice” of this basket and exposure to both the returns and risk of all the underlying REITs it holds. But crucially, because REIT ETFs hold a diversified basket of REITs, they lower risks and improve your overall risk-return profile.
Unlike REIT mutual funds, REIT ETFs trade throughout the day on stock exchanges, and can be bought and sold intra-day on most brokerage apps. They’re considered an eligible investment that can be held in most accounts.
When it comes to their strategy, Canadian REIT ETFs can be passively or actively managed. Passive REIT ETFs track an externally provided index of Canadian REITs and try to replicate the index’s holdings and performance as closely as possible. Their goal is to match the indexes performance, not beat it.
On the other hand, active REIT ETFs create their own strategies to pick and choose Canadian REITs in an attempt to outperform a specific benchmark. They’re not constrained by the rules of an external index. These ETFs tend to be costlier than their passively managed counterparts.
Unlike individual REITs, REIT ETFs charge a management expense ratio (MER), expressed as an annual percentage fee. The MER pays for the ETF manager’s trading, operational, administrative, and marketing costs. For example, a Canadian REIT ETF with a MER of 0.61% would cost around $61 annually in fees for a $10,000 investment.
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Top REIT ETFs in Canada
The following Canadian REIT ETFs provide exposure to REITs using a variety of different strategies.
|REIT ETF||Inception Date||MER|
|iShares S&P/TSX Capped REIT Index ETF (TSX:XRE)||27-Oct-2022||0.61%|
|BMO Equal Weight REITs Index ETF (TSX:ZRE)||19-May-2010||0.61%|
|CI Canadian REIT ETF (TSX:RIT)||15-Nov-2004||0.87%|
|Vanguard FTSE Canadian Capped REIT Index ETF (TSX:VRE)||02-Nov-2012||0.38%|
iShares S&P/TSX Capped REIT Index ETF
XRE is currently the most popular REIT ETF in Canada with just over $1 billion in assets under management, or AUM. This ETF tracks the S&P/TSX Capped REIT Index, which holds 18 Canadian REITs weighted according to their market cap. XRE is fairly top-heavy, with 13.1% in Canadian Apartment Properties REIT (TSX:CAR.UN) and 11.6% in Riocan REIT (TSX:REI.UN).
BMO Equal Weight REITs Index ETF
ZRE tracks the Solactive Equal Weight Canada REIT Index, which holds 24 different Canadian REITs in an equal-weighted methodology. For example, ZRE only holds REI.UN in a 4.7% weighting, similar to its 23 other REIT holdings. Investors who dislike XRE’s top-heavy nature may therefore find ZRE a more suitable investment with greater diversification.
CI Canadian REIT ETF
Investors who don’t mind paying a higher MER for an actively managed REIT ETF can consider RIT. This ETF does not track an index. Rather, the ETF manager will select REITs that are predicted to outperform and manage the portfolio on an ongoing basis. Unlike XRE and ZRE, RIT also holds U.S.-listed REITs, making it a good choice for REIT investors trying to diversify outside of Canada.
Vanguard FTSE Canadian Capped REIT Index ETF
VRE passively tracks the FTSE Canada All Cap Real Estate Capped 25%, which currently has 19 underlying holdings. Like XRE, the underlying holdings in VRE are weighted according to their market cap with a 25% limit on any single holding. However, VRE differs in that it also includes a few non-REITs. These include real estate service companies like First Service Corp (TSX:FSV) and real estate operating and development companies like Colliers International Group (TSX:CIGI). VRE is the cheapest ETF on this list.
Pros of investing in Canadian REIT ETFs
Investing in REIT ETFs can have the following advantages:
- Exposure to real estate prices: Canadian REIT ETFs allow investors to invest in real estate without the money needed for a home down payment or time needed to manage a rental property.
- Diversification: A Canadian REIT ETF holds a portfolio of REITs from all industries and thus provides more diversification than investing in single REITs.
- Capital efficiency: Buying shares of a Canadian REIT ETF requires less money than investing individually in shares of different REITs.
- Income: REITs tend to pay a higher yield compared to dividend stocks and bonds and do so on a monthly basis, making them ideal for investors seeking income.
Cons of investing in Canadian REIT ETFs
Canadian REIT ETFs can have the following disadvantages:
- Higher fees: Canadian REIT ETFs often charge a significantly higher MER than regular equity index ETFs do.
- Concentration: Market-cap weighted REIT ETFs can be heavily concentrated in only a few REITs, which makes them top-heavy and susceptible to the returns of only a few REITs.
- Interest rate vulnerability: Higher rates are usually linked to lower property values and higher borrowing costs for real estate buyers. Higher rates also make the yields on bonds more attractive, which combined with their lower risk can make investors sell REITs to buy bonds.1
Are Canadian REIT ETFs right for you?
The answer to this question depends on your time horizon, investment objectives, and risk tolerance. In general, an allocation to Canadian REIT ETFs is best suited for either:
- Advanced, long-term investors seeking an alternative to add to a portfolio of stocks and bonds.
- Income-oriented investors seeking higher yields and monthly payouts in a tax-advantaged account to augment dividend stocks and bonds.
Keep in mind that REIT RTFs have volatility similar to stocks, called market risk, but also have greater sensitivity to other macroeconomic variables like falling real estate prices. As seen during the March 2020 COVID-19 crash, REIT ETFs can experience sharp losses. Keep in mind that if you own property, you already have exposure to real estate and thus may not want the additional exposure from a REIT ETF.