4 REIT ETFs you Need to be Looking at for July 2022

Posted on June 25, 2022 by Nelson Smith

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.

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.

If you're looking for broader exposure to the market, 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'm going to be going over some of the best Canadian REIT ETFs for 2022 and beyond. But first, lets look at why owning these REITs is a better idea than becoming a landlord.

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. 

The fund's management expense ratio comes 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.

So what are the best Canadian REIT ETFs to buy?

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. Past performance can rarely be replicated because of the sheer size of the fund.

Additionally, the largest REITs are often a little overvalued, another factor that leads to poor returns.

Holdings:

wdt_ID Company Weight
1 Allied Properties REIT 4.82
2 First Capital REIT 4.82
3 Artis REIT 4.81
4 Boardwalk REIT 5.25
5 Granite REIT 5.19
6 Cominar REIT 5.17
7 Summit Industrial REIT 4.99
8 Killam Apartment REIT 4.94
9 Dream Office REIT 4.89
10 SmartCentres REIT 4.86

This ETF is also fairly large, with just over $800M, and it trades an average of 29,000 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%.

This is partly because some 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 the performance of this REIT ETF, it underperformed significantly during the COVID-19 pandemic but made a huge comeback in 2021. If we look to 1-year returns, if you had reinvested the dividends you'd be sitting on 29% at the time of writing. This would have outperformed every major index in North America in 2021.

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 7.33% over the last 10 years, and this is with the COVID-19 crash factored in. Returns before COVID-19 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 offered by this REIT ETF to Canadian investors include its large size, coming in at $1.329B in assets under management, and its overall liquidity. The fund has trading volumes in excess of 280,000 daily shares. You'll never have a problem getting in and out of this fund.

Where it lacks is again in yield. the distribution yield of the fund sits at 2.78%. 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 amount of income at the expense of total return. So, consider this with your choice.

Holdings:

wdt_ID Company Weight
1 First Capital REIT 5.75
2 H&R REIT 5.40
3 Dream Industrial REIT 5.30
4 Summit Industrial REIT 5.05
5 Canadian Apartment REIT 13.73
6 Riocan REIT 10.27
7 Granite REIT 9.26
8 Allied Properties REIT 8.35
9 Choice Properties REIT 5.87
10 SmartCentre REIT 5.81

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.

5 year dividend adjusted performance of XRE vs the TSX Index 

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, and is certainly not one you want to look at if you are looking for low cost. 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.

But, one main positive is it is one of the highest yielding on this list at 4%. It does so by investing 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.

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 $753M and trades more than 18,900 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 11.34% 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, this is by far the best performing REIT ETF on this list. Let's take a look at its holdings. Keep in mind, with this being actively managed, the fund's assets and holdings can vary wildly. So, make sure to check CI's official website.

Holdings:

wdt_ID Company Weight
1 BSR REIT 3.61
2 Minto Apartment REIT 3.44
3 Morguard REIT 3.41
4 Tricon Residential 5.73
5 Summit Industrial REIT 5.50
6 Granite REIT 5.49
7 Dream Industrial REIT 5.09
8 Canadian Apartment Properties REIT 4.48
9 Killam Apartment REIT 4.31
10 InterRent REIT 4.15

This REIT ETF is much more diverse than its peers, holding 37 different securities. It also doesn’t have as much concentration at the top of the portfolio, which helps to justify the high management fee.

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 2.89%, 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 over $360M. Average trading volume is a hair over 14,000 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 however. It hasn't outperformed the actively managed RIT, but with annualized returns of 7.81% over the last decade, it's outperformed both of the BMO and iShares ETFs.

Holdings:

wdt_ID Company Weight
1 Riocan REIT 10.29
2 Granite REIT 9.19
3 Colliers International 8.46
4 Allied Properties REIT 7.83
5 H&R REIT 6.48
6 Smartcentres REIT 5.91
7 1st Cap Realty 5.79
8 Choice Properties REIT 5.50
9 Canadian Apartment Property REIT 14.72
10 FirstService Corp 13.28

In total, this ETF has just 16 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.

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.

Another note, it's important that if possible you tax shelter these REITs. Income taxes on real estate investment trusts are not taxed as dividends, and if you're looking to make the most out of your distributions, placing them in a tax-sheltered account is a wise choice. It isn't the be-all-end-all, but certainly an easy trick to increase your monthly income and pay less to the tax man.

Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed in this article. Stocktrades Ltd may also be compensated via affiliate links in this post.

Nelson Smith

About the author

Nelson is a dividend value investor who insists on buying great dividend-paying companies when they are reasonably priced. He has been investing for more than 15 years and is now primarily focused on helping other investors build up a dependable stream of passive income. When he's not studying the markets, Nelson can be found relaxing with his wife and cat or watching the Toronto Blue Jays.