Real estate is a wonderful asset class that has made countless investors rich over the years. Much like a diversified portfolio of Canadian dividend stocks, it’s an easy no-brainer addition to your portfolio.
If you're looking for broader exposure to the market, you've come to the right spot, because in this article I'm going to be going over some of the best Canadian REIT ETFs for 2021.
Some people take this a step further and create their own real estate empire, consisting of a few rentals in their city. This is not an ideal way to get your real estate exposure.
Having your own rental property is essentially buying yourself a part-time job.
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, and so on.
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.
A top Canadian REIT ETF is clearly the better investment choice here, and many investors who are looking to learn how to invest in stocks and real estate are flocking to them.
It’s a passive investment made up of shares of Canada’s top real estate investment trusts, and most pay dividends on a monthly basis.
You don’t even have to choose individual REITs to own; buying a Canadian ETF that consists of REITs gives you instant diversification over types of real estate (like retail, office, apartments, and industrial, among others) and location.
The emergence of ETFs here in Canada, especially niche ones that cover specific areas like oil and gas ETFs, banking, bonds or even REITs have 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, and perhaps most importantly, you want a REIT ETF with a low management fee.
Fees come right out of your investment returns and minimizing them is an easy way to increase your bottom line.
Next, you’ll want to make sure the REIT ETF is properly diversified.
Some only have exposure to the largest individual REITs, meaning a lot of smaller ones are excluded. These smaller companies are underfollowed and have higher growth potential, two important 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 annoying 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 for 2020, each with their own different little twist on the sector.
BMO Equal Weight REIT ETF (TSX:ZRE)
The BMO Equal Weight REIT ETF (TSX:ZRE) owns approximately equal positions in 21 of Canada’s top real estate investment trusts. 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 favor 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 has caused it to struggle. The equal weighting of this REIT ETF is beneficial as it doesn't favor a large REIT like RioCan.
Let’s face it; when a REIT gets excessively large, it’s hard for it to move the needle much.
Additionally, the largest REITs are often a little overvalued, another factor that leads to poor returns.
|5||WPT Industrial REIT||5.22|
|6||Northwest Healthcare Properties REIT||5.18|
|8||Dream Industrial REIT||4.57|
|9||CT Real Estate REIT||4.56|
|10||Summit Industrial REIT||4.49|
This ETF is also fairly large, with close to $595 million in assets, and it trades an average of 39,000 shares per day. That’s plenty of liquidity for the average retail investor.
But this real estate ETF is hardly perfect, and that’s why I’ve given it the lowest spot on our list. Two places where it’s a little lacking is the management fee and the yield offered by the portfolio.
Let’s start with fees. Including HST, 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 isn’t the greatest, either. The current dividend yield based on trailing dividends is 4.84%.
This is partly because soe of the REITs biggest holdings don’t pay much in yield, and partly because the management fee is so high. Investors who are looking for a high payout will have to choose another Canadian REIT ETF.
In terms of performance of this REIT ETF, you'll see below that it was actually outperforming in a big way prior to COVID-19, but as a result of the pandemic it has fallen well below the returns of the TSX Index.
5 year performance of ZRE vs the TSX Index
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 6.46% over the last 10 years, and this is with the COVID-19 crash factored in. Returns prior to COVID-19 on an annual basis sat in the double digits.
Other advantages offered by this REIT ETF include its large size ($1.15 billion in assets), plenty of liquidity (with some 237,000 shares trading hands each day), and its ample trailing yield. This ETF currently yields 4.07%, which is an excellent payout.
You’ll have to buy individual REITs to do much better than this yield.
|2||First Capital REIT||4.05|
|3||Northview Apartment REIT||3.74|
|5||Canadian Apartment REIT||9.72|
|6||Allied Properties REIT||9.39|
|9||Choice Properties REIT||5.39|
As you can see, 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.
This means the rest of this ETF’s 19 holdings don’t matter so much.
Like the BMO REIT, this security has a management fee I view to be a little too high, checking in at 0.61%.
Note that even though we’re seeing ETF costs slowly decrease, many of these sector ETFs continue to keep their fees stubbornly high.
As you'll see below in terms of performance, this REIT was much the same as ZRE. It was outperforming prior to the COVID-19 market crash, and has now struggled to gain ground.
CI First Asset Canadian REIT ETF (TSX:RIT)
This REIT ETF is a little different than the rest, putting distance between its competitors in a few interesting 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. It currently stands at 0.75%. Investors should keep in mind this REIT is actively managed, which is one reason why the management fee is so high.
Its yield also isn’t great, with the current payout at just 4.90%. Prior to the crash in March, this would have been a very reasonable yield. But, a lot of real estate ETFs provide better.
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 a healthy market cap of $566.91 million and trades more than 24,000 shares on an average day.
Where this ETF really shines is its long-term returns. Over the last 10 years, this real estate ETF has returned 10.4% to investors, and this is with the March 2020 crash factored in. Prior to that crash, it was providing even better returns to investors.
In fact, as you'll see with the 5 year chart below, this is by far the best performing REIT ETF on this list. It's still underperforming the broader market, but has outperformed every other ETF on this list by double digits. But first, lets look at what's inside.
|1||First Capital Realty||4.08|
|3||Tricon Capital Group||4.02|
|5||Canadian Apartment Properties REIT||5.19|
|6||Dream Industrial REIT||4.61|
|7||Allied Properties REIT||4.42|
|8||Killam Apartment REIT||4.30|
|9||Dream Global REIT||4.26|
|10||Morguard NA Residential REIT||4.10|
This REIT ETF is much more diverse than its peers, holding 36 different securities. It also doesn’t have as much concentration at the top of the portfolio, which helps to justify the high management fee.
5 year dividend adjusted performance of RIT vs the TSX Index
Vanguard FTSE Canadian Capped REIT 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 really 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 0.35%, which is easily the lowest among its peers. That alone will put an additional $20 to $35 per year back in your pocket, based on a $10,000 investment. That really adds up over time.
Where this ETF struggles is its yield however, with the current payout at 3.51%, the lowest on this list.
It’s also the smallest out of all the REIT ETFs profiled today, with total assets of just over $257 million.
Average trading volume is a hair over 20,000 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.
Prior to COVID-19, as you'll see with our performance chart the ETF was outperforming by a decent margin, and we expect when things get back to normal (which, who knows when that will be) it will continue to do the same.
|1||Choice Properties REIT||7.25|
|5||Chartwell Retirement Residences||3.84|
|6||Canadian Apartment Property REIT||17.35|
|7||Allied Properties REIT||10.79|
In total, this ETF has just 17 different holdings. 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 a little different than its peers. It holds shares of First Service Corp and Colliers International, two real estate service companies that don’t own properties themselves. That gives it a little unique flavor compared to others on this list.
5 year dividend adjusted performance of VRE vs the TSX Index
The bottom line
If you’re looking for a Canadian REIT ETF, the choice is clear. Vanguard’s entry is best. It wins the REIT ETF category, just like it wins so many others. Its low fees are a huge advantage, something that immediately translates into higher dividends.
And with the security of the largest provider of ETFs behind you, investors can be confident this Vanguard ETF will be around for decades to come.
If you want real estate exposure in your portfolio, you could do much worse.