Last updated on May 15th, 2022 at 09:43 pm
The best REIT ETF in Canada is a great choice for investors looking for an easy and inexpensive way to invest in Canadian real estate. No dealing with realtors, no bidding wars, and no failed inspections. Real estate investment trust ETFs are your ticket for diversifying into real estate while earning some significant income along the way.
- What are REIT ETFs?
- Why Invest in REIT ETFs?
- Vanguard FTSE Canadian Capped REIT Index ETF
- iShares S&P/TSX Capped REIT Index ETF
- BMO Equal Weight REITs Index ETF
- CI First Asset Canadian REIT ETF
- Best Canadian REIT ETF Comparison
- Choosing the Best REIT ETF in Canada
- Thanks for Reading!
What are REIT ETFs?
REITs, or real estate investment trusts, are companies that invest in income-producing real estate. Think apartments, office buildings, and retail centers. Canadian REITs can be purchase on the Toronto Stock Exchange and are required to distribute most of their earnings to investors – typically 85% or more.
REIT ETFs (exchange-traded funds) are funds that invest in REITs. These funds employ different strategies for how they invest in REITs. Often they try to follow a benchmark, which dictates how much of each particular REIT they can own.
Why Invest in REIT ETFs?
REIT ETFs are more popular than ever and have attracted billions in assets over the years. There are a few great reasons why investors love REIT ETFs.
First of all, REITs are a simple and effective asset class for generating dividend income. Since REITs must distribute at least 85% of their net profit as dividends, unitholders can earn significant income by investing in REITs.
Another reason REITs are so popular is because they’re the cheapest way to invest in real estate in Canada. Best of all, instead of having all of your real estate investments tied up in a single property, REITs diversify across numerous properties.
An even more diversified strategy for investing in REITs is to invest in a REIT ETF. You don’t need to pick whether you’d like to target residential, commercial, or industrial real estate. With a REIT ETF, you can own a piece of them all.
Vanguard FTSE Canadian Capped REIT Index ETF
Dividend Yield: 3.05%
Management Expense Ratio (MER): 0.38%
Assets Under Management: $348 million
Established in 2012, the Vanguard FTSE Canadian Capped REIT Index ETF (VRE) provides investors with a low-cost option for investing in Canadian REITs. It boasts an MER of just 0.39%, which is the lowest in the Canadian REIT ETF space today.
VRE is known as a capped index, and won’t hold invest more than 25% of its assets in a single REIT. Despite this, VRE is top-heavy with its top 5 holdings representing more than 50% of its total assets.
Unfortunately, VRE’s low MER isn’t enough to make up for its below-average dividend yield. And at just 15 holdings, one might be tempted to just build their own basket of select REITs, and save the fee. This may be the reason why VRE has attracted only $258 million in assets so far.
iShares S&P/TSX Capped REIT Index ETF
Dividend Yield: 3.41%
Management Expense Ratio: 0.61%
Assets Under Management: $1,319 million
The iShares S&P/TSX Capped REIT Index ETF (XRE) was established in 2002. Since that time, XRE has managed to attract over a billion in assets, making it Canada’s largest REIT ETF.
Like VRE, iShares’ REIT ETF is also top-heavy, with its top 5 constituents making up nearly 50% of its total assets. The two funds’ holdings differ slightly, with XRE investing in real estate service businesses like FirstService Corp (FSV) and Colliers Internaitonal Group Inc (CIGI).
The main problem with XRE is its relatively high MER – especially when you consider that it only has 20 total holdings. On top of this high fee, XRE only yields about 2.90% in dividends. This paltry yield is hardly enough to entice your average dividend-hungry investor.
BMO Equal Weight REITs Index ETF
Dividend Yield: 4.20%
Management Expense Ratio: 0.61%
Assets Under Management: $791 million
The BMO Equal Weight REITs Index ETF (ZRE) is another Canada-focused REIT ETF. ZRE tracks the Solactive Equal Weight Canada REIT Index and holds an equal proportion of the REITs it invests in. This structure is uncommon for an index ETF, and it’s the reason why ZRE allocates about 4.5% of its assets to each of its 23 holdings.
Because of its unique structure, ZRE is far less top-heavy than other Canadian REIT ETFs. The top 5 constituents of ZRE make up just 25% of its total assets. A small REIT like Boardwalk (BEI) makes up just 2.3% of XRE’s assets, while in ZRE it’s one of the top holdings at 5.0%.
Although its MER is on the higher end, BMO provides relatively good value for an investor looking to diversify adequately across Canadian REITs. And at a dividend yield of 4.63%, ZRE makes investing worthwhile for anyone looking to add significant income to their portfolio.
CI First Asset Canadian REIT ETF
Dividend Yield: 4.24%
Management Expense Ratio: 0.75%
Assets Under Management: $746 million
The CI First Asset Canadian REIT ETF (RIT) is an active fund that seeks to achieve dividend income and capital appreciation through its REIT investments. Like some of the other REIT ETFs in Canada, RIT also invests in non-REIT companies, like those focused on real estate operations and services.
Despite being actively managed, there is considerable overlap between RIT’s top holdings and the top holdings of the other Canadian REIT ETFs. However, some equities are uniquely held by RIT. This includes Tricon Residential Inc, which is RIT’s largest holding at just over 5%.
Investing in foreign REITs is another aspect of RIT that sets it apart. Given that it’s actively managed, it tries to find returns wherever they may be. Because of this, RIT has 8.7% of its assets allocated to foreign REITs. Despite being Canada-focused, its prospectus highlights that up to 30% of the fund’s assets may be invested in foreign securities.
Best Canadian REIT ETF Comparison
Sector Weightings of Canadian REIT ETFs
Each REIT ETF has sizable investments in retail, residential, industrial, and office real estate assets. VRE has the largest allocation of office real estate, at 19%. XRE holds the title for retail, with a 33% allocation.
Perhaps most interesting is how RIT has chosen its investments. As the only actively managed ETF on this list, RIT has set itself apart by being the most heavily invested in residential real estate. They also have the smallest amount invested in office real estate, at just 6%.
Past Performance of Canadian REIT ETFs
The performance of Canadian REIT ETFs was abysmal in 2020. This can be attributed to the economic contraction in the retail and office sectors. One saving grace has been residential real estate, which has seen lower rents as of late, but significant asset appreciation.
In 2021, REITs bounced back in a big way, with most returning upwards of 30%! However, their recent calendar performance doesn’t tell the whole story. Looking at their average annualized performance over the past 5 years, the ETFs returned 11.3%, 15.5%, 13.9%, and 7.8% respectively.
It’s interesting that VRE and XRE, which are both overweight their top 5 holdings, each returned around 11% annualized. While the comparably more diversified ETFs, ZRE and RIT, performed much different than eachother. RIT was the worst performing both in 2021 and over the past 5 years. It’ll be interesting to see how these ETFs do in 2022 and beyond.
Choosing the Best REIT ETF in Canada
There is no perfect REIT ETF in Canada. Each of the available ETFs has some tradeoffs that make them more or less attractive than their peers.
Looking at Vanguard’s VRE and iShares’ XRE, it’s hard to justify either of these funds as the best REIT ETF in Canada when they’re so top-heavy. Both have half of their assets tied up in their top 5 holdings which makes insufficiently diversified for an ETF.
On the other end of the spectrum is RIT, which has the most holdings for a Canadian REIT ETF. The tradeoff with RIT being that it also has the highest MER and an actively managed strategy that may lag the index over time.
With this in mind, it’s clear that the BMO Equal Weight REITs Index is the best REIT ETF in Canada. Its MER is average for a REIT ETF, while its dividend yield is above average. Also, ZRE’s equal weight strategy ensures it’s adequately diversified; its performance won’t be overly influenced by a handful of Canada’s largest real estate investment trusts.
Thanks for Reading!
I hope you enjoyed my analysis of the best REIT ETFs in Canada. If you’re interested in learning about other great ETFs, check out my review of the best preferred share ETF in Canada and my article on the best dividend ETFs for Canadians
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