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?
- HCRE ETF Review
- PHR ETF Review
- REIT ETF Review
- RIT ETF Review
- VRE ETF Review
- XRE ETF Review
- ZRE ETF Review
- Best Canadian REIT ETF Comparison
- Common Canadian REIT ETF Comparisons
- 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 purchased 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!
HCRE ETF Review
Dividend Yield: 4.57%
Management Expense Ratio: 0.33%
Assets Under Management: $58 million
The Horizons Equal Weight Canada REIT Index ETF (HCRE) is a unique ETF that uses a total return swap contract to replicate the performance of its index while increasing tax efficiency. Essentially, HCRE uses swaps to avoid making taxable distributions to its unit holders. This is advantageous if holding HCRE in a taxable account or if you otherwise want to avoid receiving income from your investment.
Perhaps because of its unique structure as a swap-based ETF, HCRE boasts an impressive MER of just 0.33%. This is much lower than most other REIT ETFs in Canada. And while it doesn’t pay distributions, it has an effective yield of 4.57%. This yield is automatically reflected in the HCRE’s net asset value instead of paid out to unit holders.
So on the surface, HCRE looks like the ideal REIT ETF—low MER, high yield, and well diversified. However, its swap-based strategy may give some investors pause. HCRE has only been around since 2019, and at just $58 million in assets, it may take more time for investors to warm up to its strategy.
PHR ETF Review
Dividend Yield: 4.10%
Management Expense Ratio: 0.80%
Assets Under Management: $31 million
The Purpose Real Estate Income Fund (PHR) is an active fund that uses a combination of macro, fundamental, and technical factors to select its constituents. And unlike other REIT ETFs in Canada, PHR invests a significant amount of its assets in REITs from the United States. Around 35% of its assets are based in the U.S. while 59% are from Canada.
Because it’s an active ETF, PHR has a much higher management expense ratio (MER) than most of the other REIT ETFs in Canada. PHR has also attracted only $31 million in assets, which is very low for an ETF.
The combination of high MER, low assets under management, and a low amount of holdings—just 17—makes PHR a tough sell for most investors. However, if you believe in their active strategy, that could outweigh the otherwise poor fundamentals of this ETF.
REIT ETF Review
Dividend Yield: 3.96%
Management Expense Ratio: 0.48%
Assets Under Management: $19 million
The Invesco S&P/TSX REIT Income Index ETF (REIT) was established in 2017, and despite having the ideal ticker for a REIT ETF, it has only attracted $19 million in assets. This is on the very low end of viability for an ETF, even in the small market space of REIT ETFs.
Despite that, Invesco S&P/TSX REIT Income Index ETF does have some redeeming qualities. Mainly its low MER of 0.48% and a reasonably high dividend yield of 3.96%. It accomplishes this by seeking to replicate the S&P/TSX Capped REIT Income Index.
Invesco’s REIT could be a good choice for investors who are comfortable with some of Invesco’s other popular ETFs and are happy with its indexing strategy.
RIT ETF Review
Dividend Yield: 4.59%
Management Expense Ratio: 0.87%
Assets Under Management: $645 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.
VRE ETF Review
Dividend Yield: 4.20%
Management Expense Ratio (MER): 0.38%
Assets Under Management: $330 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 0.38%, which is the lowest in the Canadian REIT ETF space today.
And because it’s a Vanguard ETF, they’re committed to making their funds even more affordable for investors. Just recently, VRE was able to decrease its MER by 0.01% (from 0.39% to 0.38%).
VRE is known as a capped index and won’t invest more than 25% of its assets in a single REIT. Despite this, VRE is top-heavy, with its top 5 holdings representing around 50% of its total assets.
XRE ETF Review
Dividend Yield: 4.42%
Management Expense Ratio: 0.61%
Assets Under Management: $1,146 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 International Group Inc (CIGI).
The main problem with XRE is its relatively high MER – especially when you consider that it only has 17 total holdings. However, XRE does have an impressive dividend yield. At an annualized yield of 4.42%, XRE is near the top of the pack in terms of Canadian REIT ETFs.
ZRE ETF Review
Dividend Yield: 4.53%
Management Expense Ratio: 0.61%
Assets Under Management: $651 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 4.53%, ZRE makes investing worthwhile for anyone looking to add significant income to their portfolio.
Best Canadian REIT ETF Comparison
Best Canadian REIT ETFs – Fundamentals
When comparing Canadian REIT ETFs, we can see that each has a dividend yield of around 4% or more. They also all pay monthly, making them good candidates for investors looking for cash flow from their investments (except for HCRE, which doesn’t have actual distributions).
The ETF that stands out to me is VRE, with an MER of just 0.38% and a dividend yield of 4.20%. PHR and RIT also stand out, but only because of their higher-than-average MERs of 0.80% or more.
Something else to notice is the distribution of holdings. Many of the ETFs in this list have around 20 holdings. This may seem like a small amount, but in fact, there are just not that many REITs in Canada. The funds with more holdings typically invest in additional assets like specific real estate-related businesses or REITs located outside of Canada.
Best Canadian REIT ETFs – Sector Weightings
Each REIT ETF has sizable retail, residential, industrial, and office real estate investments. VRE has the largest allocation of office real estate, at 12%. Both VRE and XRE have the most invested in retail real estate at 40% each.
Unfortunately, RIT recently removed some information on its allocations from the Invesco website. But last year’s numbers showed it had 19% retail, 31% residential, and 21% industrial. This would put it near the top of the pack for investments in residential real estate, only behind PHR, which has 36% of its assets allocated to that sector.
Best Canadian REIT ETFs – Past Performance
The performance of Canadian REIT ETFs was abysmal in 2022. 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 rents rise dramatically in 2022 and so far in 2023.
It’s interesting that VRE and XRE, which are both overweight their top 5 holdings, and each performed so similiarly in the past two years. While the comparably more diversified ETFs, ZRE, PHR and RIT, performed worse last year.
We can also see a good sign for HCRE’s swap-based strategy in these performance numbers. In the past three years, HCRE’s performance has been almost identical to ZRE, which follows the same Solactive Equal Weight Canada REIT Index that HCRE seeks to replicate.
Common Canadian REIT ETF Comparisons
XRE vs VRE
When comparing XRE vs VRE, the first thing that stands out is their different management expense ratios. At 0.38%, Vangaurd’s VRE is significantly cheaper than iShare’s XRE. XRE does have a slightly higher dividend yield, at 4.42%, but not quite high enough to make up for their difference in MER.
Much of their difference in dividend yield can be attributed to their indexes. VRE seeks to replicate the FTSE Canada All Cap Real Estate Capped 25% Index while XRE uses the S&P/TSX Capped REIT Index.
When deciding against XRE vs VRE, the deciding factor seems to be their MER. At just 17 holdings, it’s hard to justify XRE’s management expense ratio of 0.61%.
ZRE vs VRE
ZRE vs VRE comes down to what you’re looking for in a REIT ETF. Vanguard’s VRE definitely has the more attractive management expense ratio, saving you 23 basis points per year when compared to ZRE. While ZRE is slightly more diversified than VRE, with 4 more holdings.
BMO’s ZRE also performed much better in 2022, only losing 17.4%, while VRE lost 22.6%. Meanwhile, VRE performed much better in 2021.
Probably the deciding factor is their strategy. ZRE is an equal-weight REIT ETF, meaning it invests in an equal number of each of its holdings. While VRE is a capped index, which caps each holding at a maximum of 25%. This means that VRE is much more top-heavy than ZRE, with almost 50% of its total assets allocated to its top 5 holdings. So if you’re looking for better diversification, ZRE may be the superior choice.
XRE vs ZRE
XRE vs ZRE is a difficult comparison. Both ETFs have the exact same management expense ratio of 0.61%. They also have a similar amount of holdings, at 17 and 23 holdings respectively. They are also both among the most popular REIT ETFs in Canada, with XRE having $1,146 million in assets while ZRE has $651 million.
Their indexes are different, with XRE using the S&P/TSX Capped REIT Index while ZRE uses the Solactive Equal Weight Canada REIT Index. Despite this, they have performed identically over the past two years.
Likely the deciding factor between XRE vs ZRE is their issuers. Investors who are comfortable with iShares ETFs will likely go with XRE. While investors with a relationship with BMO will probably be more comfortable with ZRE. In the end, both are excellent choices.
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 them 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 is that it also has the highest MER and an actively managed strategy that may lag a REIT index over time.
With all this in mind, the BMO Equal Weight REITs Index ETF (ZRE) may be the best all-around REIT ETF in Canada. Its MER is average for a REIT ETF, while its dividend yield is above average. Best of all, ZRE’s equal weight strategy ensures it’s adequately diversified.
Another choice for the best Canadian REIT ETF is the Horizons Equal Weight Canada REIT Index ETF (HCRE). This is a unique fund that uses swaps to replicate the performance of the Solactive Equal Weight Canada REIT Index. It’s tax efficient, cheap, and has great performance. For investors comfortable with its strategy, HCRE may be the best REIT ETF in Canada.
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!