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. 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'm going to be going over some of the best Canadian REIT ETFs. 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. 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 a pain in the rear, no doubt.
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 the best Canadian REITs, 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, apartments, industrial, and office REITs, 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 to own right now, each with its own different little twist on the sector.
So what are the best Canadian REIT ETFs to buy?
- BMO Equal Weight REIT ETF (TSX:ZRE)
- iShares S&P TSX Capped REIT Index ETF (TSX:XRE)
- The CI First Asset Canadian REIT ETF (TSX:RIT)
- Vanguard FTSE Canadian Capped REIT ETF (TSX:VRE)
BMO Equal Weight REITs Index ETF (TSX:ZRE)
The BMO Equal Weight REITs Index ETF (TSX:ZRE) owns approximately equal positions in 23 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 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 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 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.
This ETF is also fairly large, with just over $550M in assets under management, and it trades an average of 33,000 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 are 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 5%.
This is partly because some of the ETFs 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.
Its top holdings contain the likes of H&R Real Estate (TSE:HR.UN), CT REIT (TSE:CRT.UN), Northwest Healthcare REIT (TSE:NWH.UN), and Choice Properties (TSE:CHP.UN)
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 large downside yet again.
If you're purchasing this REIT ETF, or any other REIT for that matter, it is very important you 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 4% over the last 10 years, and this is with the COVID-19 crash and the recent REIT drawdown factored in. Returns before both of 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 offered by this REIT ETF to Canadian investors include its large size, coming in at $900M~ in assets under management, and its overall liquidity. The fund has trading volumes in excess of 577,000 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.
Where it lacks is again in yield. the distribution yield of the fund sits at 4.15%. 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.
Its top holdings contain the likes of Canadian Apartment REIT (TSE:CAR.UN), Riocan (TSE:REI.UN), Granite REIT (TSE:GRT.UN), and Allied Properties (TSE:AP.UN).
One thing to note, 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 14%.
This means the rest of this ETF’s 15 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.
In terms of performance, this REIT was much the same as ZRE. It was outperforming prior to the COVID-19 market crash and 2022 REIT drawdown, and has now struggled to gain ground.
The 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 0.87%. 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 5.3%. 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 $568M and trades more than 22,900 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 8% annually to investors, and this is with the March 2020 crash and 2022 drawdownfactored in. Prior to that crash, it was providing even better returns to investors. This 8% annualized return leaves XRE and ZRE in the dust.
Currently, its largest holdings are Summit Industrial REIT (TSE:SMU.UN), First Capital REIT (TSE:FCR) and Canadian Apartments REIT (TSE:CAR.UN). 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.
This REIT ETF is also much more diverse than its peers, holding 39 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 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 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 0.38%, 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 3.99%, 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 $256M. Average trading volume is a hair over 7,000 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, but with annualized returns of 5%~ over the last decade, it's outperformed both the BMO and iShares ETFs.
In total, this ETF has just 19 different holdings. We see REITs like Canadian Apartment REIT, First Service, Riocan, and Granite 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 a little different than its peers. It holds shares of Firstservice 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.