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 2020.
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. 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.
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.
4. 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.
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.
|1||Northview Apartment REIT||4.78%|
|4||Dream Office REIT||5.32%|
|6||CT Real Estate Trust||5.26%|
|7||Dream Industrial REIT||4.96%|
|10||Northwest Healthcare REIT||4.82%|
This ETF is also fairly large, with close to $700 million in assets, and it trades an average of 27,000 shares per day. That’s plenty of liquidity for the average retail investor.
But this 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 4.1%. 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.
3. iShares S&P TSX Capped REIT Index ETF
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 total returns of approximately 10% per year.
Other advantages offered by this REIT ETF include its large size ($1.4 billion in assets), plenty of liquidity (with some 170,000 shares trading hands each day), and its ample trailing yield. This ETF currently yields 4.9%, which is an excellent payout.
You’ll have to buy individual REITs to do much better than this yield.
|1||Canadian Apartment Properties||14.67%|
|3||Allied Properties REIT||10.45%|
|6||Choice Properties REIT||5.85%|
|7||Graniate REIT Trust||5.83%|
|10||Killam Apartment REIT||3.02%|
As you can see, this REIT is rather top-heavy. Its top five holdings account for more than 50% of its total holdings. 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.
2. CI First Asset Canadian REIT ETF
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 4.19%.
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 $627 million and trades more than 27,000 shares on an average day.
Where this ETF really shines is its long-term returns. Since inception, this security has grown a $10,000 initial investment into something worth more than $50,000, assuming dividends were reinvested the whole way. That’s a 415.5% return. And, perhaps more importantly, this ETF has beaten its benchmark by more than 1% annually since 2004, an impressive feat considering the high management fee.
|1||First Capital Realty||3.91%|
|3||Tricon Capital Group||3.71%|
|5||Canadian Apartment Properties REIT||4.78%|
|6||Dream Industrial REIT||4.76%|
|7||Allied Properties REIT||4.25%|
|8||Killam Apartment REIT||4.23%|
|9||Dream Global REIT||4.13%|
|10||Morguard NA Residential REIT||4.00%|
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.
1. Vanguard FTSE Canadian Capped REIT ETF
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 0.39%, 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.
This ETF also gives one of the best yields among its peers, with the current payout at 4.92%.
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 9,300 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. Including reinvested dividends, a $10,000 initial investment is now worth just under $18,000.
This REIT’s top holdings are built with a little more yield in mind.
|1||Choice Properties REIT||5.73%|
|2||Colliers International Group||5.67%|
|3||Chartwell Retirement Residences||4.80%|
|5||Canadian Apartment Properties REIT||13.64%|
|6||Allied Properties REIT||9.78%|
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.
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.