Real estate is a beautiful asset class that has made countless investors rich. Much like a diversified portfolio of Canadian dividend stocks, it's an easy, no-brainer addition to your portfolio.
Some people take this a step further and create their real estate empire, consisting of a few rentals in their city. This is not an ideal way to get your real estate exposure. Why not just acquire residential REITs instead?
If you're looking for broader exposure to the market and a regular income stream, you've come to the right spot. There's an easier way to get exposure to the real estate sector. And that is through REITs.
In this article, I will be going over some of the best Canadian REIT ETFs.
Four top Canadian REIT ETFs to own right now
BMO Equal Weight REITs Index ETF (TSX:ZRE)
The BMO Equal Weight REITs Index ETF (TSX:ZRE) owns approximately equal positions in 24 of Canada's top real estate investment trusts. The fund seeks to replicate the performance of the Solactive Equal Weight Canada REIT Index.
The portfolio is periodically rebalanced as certain REITs outperform their peers, which leads to them having a bigger position.
This equal-weighting perspective has one distinct advantage. It doesn't favour the largest REITs, securities that have historically underperformed some of their smaller peers.
A prime example during COVID-19 would be RioCan. Being one of the largest REITs in Canada and having a large commercial asset base caused it to struggle. The equal weighting of this REIT ETF is beneficial over a market cap-weighted one as it doesn't favor a large REIT like RioCan.
Let's face it; when a REIT gets excessively large, it's hard to move the needle much. Past performance can rarely be replicated because of the fund's sheer size. Additionally, the largest REITs are often overvalued, another factor leading to poor returns.
This ETF is also relatively large, with just over $550M in assets under management.
But this real estate ETF is hardly perfect. The management fee and the yield offered by the portfolio are two places where it's a little lacking.
Let's start with fees. The management fee stands at 0.61%. Although that's a vast improvement over mutual funds and their 1-2% average fees, that's still more than most investors will want to pay.
The yield hasn't historically been the greatest either, however with the recent drawdown in REITs its getting a bit better at 5%~.
The lower yield is partly because some of the ETF's biggest holdings don't pay much in yield and partly because the management fee is so high. Investors looking for a high payout will have to choose another Canadian REIT ETF.
Its top holdings contain the likes of Chartwell Retirement Residences (TSE:CSH.UN), Boardwalk Real Estate Investment Trust (BEI.UN), and Canadian Apartment REIT (TSE:CAR.UN). However, because this fund is equal weighted, the difference between the top and bottom allocation is often just a percent or two.
In terms of the performance of this REIT ETF, it has been, much like many other funds, extremely volatile. The ETF tanked during the COVID-19 pandemic before surging to new highs with the re-opening of the economy.
But now, with rising interest rates making a recession extremely likely, we are seeing a large drawdown yet again.
If you're purchasing this REIT ETF or any other REIT for that matter, you must think long-term, or these types of returns could have you making short-term panic mistakes.
iShares S&P TSX Capped REIT Index ETF (TSX:XRE)
The iShares S&P TSX Capped REIT Index ETF (TSX:XRE) has been around the longest out of the four profiled today, making its trading debut on the Toronto Stock Exchange back in 2002.
It's a solid choice that has delivered annual returns of 6% over the last ten years, and this is with the COVID-19 crash, and the recent REIT drawdown factored in. Returns before these events on an annual basis sat in the double digits. Future results are never guaranteed, but the more reliable history we have, the better.
Other advantages this REIT ETF offers Canadian investors include its large size, $1B~ in assets under management and overall liquidity. The fund has trading volumes of over 514,000 daily shares. You'll never have a problem getting in and out of this fund, as it is the largest REIT ETF in the country.
The fund's distribution yield sits at just over 5% at the time of writing. The fund's investment objective is primarily to achieve long-term capital growth. So, it isn't an ETF that focuses on getting Canadians the highest income at the expense of total return but still does provide a decent yield, all things considered.
This REIT is rather top-heavy. Its top five holdings account for around 50% of its total holdings, with Canadian Apartment Properties (TSX:CAR.UN) making up a pretty hefty chunk at 16%.
This means the rest of this ETF's 13 holdings don't matter as much.
Like the BMO REIT, this fund has a management fee of 0.61%, meaning you'll pay $6.10 per $1000 invested annually.
Even though we see ETF costs slowly decrease, many of these sector and niche ETFs continue to keep their fees stubbornly high.
In terms of performance, this REIT was much the same as ZRE. It was outperforming before the COVID-19 market crash and 2022/2023 REIT drawdown and has now struggled to gain ground.
Hold it for the long term, and you should be fine.
Vanguard FTSE Canadian Capped REIT Index ETF (TSX:VRE)
Vanguard dominates the passive investing world, and it's easy to see why.
The company's products are built to last and usually have the lowest fees. Vanguard knows fees are what matter in the ETF world; the company is playing a big part in constantly pushing management fees lower.
The Vanguard FTSE Canadian Capped REIT ETF (TSX:VRE) is no exception. It has a management fee of just 0.38%, easily the lowest among its peers. That alone will put an additional $38 per year back in your pocket, based on a $10,000 investment. That adds up over time.
Where this ETF struggle is its yield, however, with the current payout at 3.6%, one of the lowest on this list. It's also the smallest out of all the REIT ETFs profiled today, with total assets of just under $300M. The average trading volume is a hair over 4,000 shares daily, which should be enough liquidity for regular investors.
Since its inception in late-2012, the Vanguard Canadian Capped REIT ETF has delivered solid returns. It hasn't outperformed the actively managed RIT that we'll talk about next, but with annualized returns of 6.5%~ over the last decade, it's topped both the BMO and iShares ETFs.
In total, this ETF has just 18 different holdings. REITs like Canadian Apartment REIT, First Service, Riocan, and Granite are in the top 5 holdings. In fact, its top holdings are very similar to the iShares Capped REIT ETF, but Vanguard's product comes with a much smaller management fee.
Additionally, this ETF's portfolio is different from its peers. It holds shares of Firstservice Corp and Colliers International, two real estate service companies that don't own properties. That gives it a unique flavour compared to others on this list.
The CI First Asset Canadian REIT ETF (TSX:RIT)
This REIT ETF differs from the rest, putting distance between its competitors in a few exciting ways.
First off, the big negative. The CI First Asset Canadian REIT ETF (TSX:RIT) has the highest management fee of all the Canadian REIT ETFs profiled today and is certainly not one you want to look at if you are looking for a low-cost fund.
It currently stands at 0.87%. Investors should keep in mind this REIT is actively managed, which is one reason why the management fee is so high.
Its strategy is to invest in securities of Canadian real estate investment trusts that provide the largest potential return and income at the time, instead of being passively managed and tracking an index.
The fund's yield is much the same as the other funds on this list, hovering in the 5% range. However, because it's actively managed, the distribution can change wildly as the fund reorganizes its holdings.
This ETF has been around for a long time, primarily sold as a mutual fund under the CI family. It debuted as a mutual fund in 2004 and converted to an ETF in 2015. It has healthy AUM of $550M and trades more than 13,000 shares on an average day.
Where this ETF shines is its long-term returns. Over the last ten years, this real estate ETF has returned nearly 8.5% annually to investors, with the March 2020 crash and 2022/2023 drawdown factored in. It thumps both ZRE and XRE in terms of performance, making its management fee worth it thus far.
Before those crashes, it was providing even better returns to investors. We can now see how active management can sometimes benefit, allowing the fund to adapt to current conditions instead of simply following an index.
Currently, its largest holdings are Dream Industrial REIT (TSE:DIR.UN), Killam Apartment REIT (TSE:KMP.UN), Tricon Residential (TCN.TO), and Granite REIT (TSE:GRT.UN). With this being actively managed, the fund's assets and holdings can vary wildly. So, make sure to check CI's official website.
This REIT ETF is much more diverse than its peers, holding 39 securities. It also doesn't have as much concentration at the top of the portfolio, which helps to justify the high management fee.
Having your own rental property is buying yourself a part-time job.
Let's look at why owning these REITs is a better idea than becoming a landlord.
First, you've got to rent the place, a process that might involve multiple showings and a bunch of back and forth. Next up is doing all the lease paperwork, checking your tenant's references, etc.
Then the property must be maintained, and you'll have to chase the tenant for their rent. And finally, on top of all that, you'll have to do up the books and keep a detailed record of all expenses.
Yes, there is the benefit of long-term capital appreciation of the property and the ability to store real estate equity to build your net worth. However, owning physical entities is undoubtedly a pain in the rear.
A top Canadian REIT ETF is the better investment choice here. Many investors looking to learn how to invest in stocks and real estate are flocking to them.
It's a passive investment comprised of shares of the best Canadian REITs, and most pay monthly dividends.
You don't even have to choose individual REITs to own; buying a Canadian ETF that consists of REITs gives you instant diversification over real estate types (like retail, apartments, industrial, and office REITs, among others) and location.
The emergence of ETFs here in Canada, especially niche ones covering specific areas like oil and gas ETFs, banking, bonds, or even REITs, has made diversification ridiculously easy. Much easier than buying individual stocks.
As a result, just one of these ETFs will give you an instant portfolio that spans Canada and even into other nations.
What makes a good REIT ETF?
There are upwards of 10 different Canadian REIT ETFs in Canada. What makes one better than the others?
It comes down to three factors.
Firstly, perhaps most importantly, you want a REIT ETF with a low management fee.
The fund's management expense ratio comes right out of your investment returns. Minimizing them is an easy way to increase your bottom line.
Next, you'll want to ensure the REIT ETF is appropriately diversified.
Some only have exposure to the largest individual REITs, meaning many smaller ones are excluded. These smaller companies are underfollowed and have higher growth potential, two critical factors that could lead to better long-term returns.
And finally, liquidity is a factor.
Small ETFs that don't trade much are annoying to buy. They're also more likely to get closed, which is a particularly irritating problem for passive investors. It's far better to stick with the bigger ones.
Let's take a closer look at four top Canadian REIT ETFs to own right now, each with its different little twist on the sector.
The bottom line
All of these REIT ETFs are solid. However, there are two here that stand out, and that is RIT and VRE. VRE's low fees are a huge advantage, immediately translating into higher returns all else equal.
CIT's active management has paid off in a big way. Although never guaranteed, management has shown the ability to pick the suitable REITs in many different environments.
With the security of the largest ETF provider behind you, investors can be confident the Vanguard ETF will be around for decades to come. But I don't think any of these REITs funds are going anywhere anytime soon.
On another note, it's essential that, if possible, you tax shelter these REITs. Income taxes on real estate investment trusts are not taxed as dividends. If you want to maximize your distributions, placing them in a tax-sheltered account is a wise choice.
It isn't the be-all-end-all, but indeed an easy trick to increase your monthly income and pay less to the tax man.