Best REIT ETFs in Canada
What You Should Know
- Real estate is the largest asset class.
- Traditionally, investment in real estate is significant, concentrated, illiquid and very involved.
- Real estate investment trust (REIT) exchange-traded funds (ETFs) allow diversified, liquid and passive investment of any size in real estate.
Large and Midsize Real Estate ETFs in Canada
| Annualized Return | |||||||
|---|---|---|---|---|---|---|---|
| Name | Ticker | Last Price | Yield (%) | YTD Return (%) | 1 Year | 3 Years | 5 Years |
| iShares S&P/TSX Capped REIT Index ETF | XRE | 16.04 | 4.19 | −21.06 | −19.29 | −3.03 | 4.06 |
| CI Canadian REIT ETF | RIT | 15.59 | 5.28 | −23.69 | −21.30 | −1.65 | 4.51 |
| BMO Equal Weight REITs Index ETF | ZRE | 21.34 | 5.22 | −20.68 | −19.12 | −0.41 | 5.88 |
| Russell Investments Real Assets ETF | RIRA | 17.21 | 5.19 | −11.84 | −7.71 | NA | NA |
| Vanguard FTSE Canadian Capped REIT Index ETF | VRE | 28.36 | 4.04 | −24.67 | −22.85 | −3.54 | 2.6 |
| Purpose Strategic Yield Fund ETF | SYLD | 18.42 | 6.34 | −7.60 | −7.19 | 5.04 | NA |
| iShares Global Real Estate Index ETF | CGR | 25.95 | 2.76 | −25.04 | −18.69 | −4.65 | 0.9 |
| Purpose Multi-Asset Income Fund ETF | PINC | 18.42 | 5.48 | −12.29 | −11.04 | 3.6 | NA |
Data from morningstar.ca as of Oct 28, 2022
There are around 14,980,000 private dwellings of different types in Canada. The average home price in Canada is approximately $640,000 as of September 2022. As a result, $9,587 billion of Canadian wealth is in the residential real estate market, while the Toronto Stock Exchange market capitalization is $3,891 billion. Thus real estate is the most important store of wealth in Canada. The situation is quite similar in many other countries.
There are several drawbacks associated with real estate investment. These drawbacks include
- a large minimum investment size,
- lack of liquidity,
- the difficulty of diversification,
- the necessity of involvement,
- high transaction cost.
In the case of a real estate investment, that is to say; you can use the property you are buying as collateral to borrow money at a favourable mortgage rate. In real estate investment, it is common to use a debt-to-equity ratio of 4, meaning that you borrow 4 dollars for every dollar you put toward purchasing your future property. The debt-to-equity ratio is commonly used to measure and compare leverage. Despite using leverage, most of us need to use an intermediate investment to prepare our down payment for a real estate investment.
This intermittent investment can be a combination of savings accounts, guaranteed investment certificates, exchange-traded funds and mutual funds.
Another drawback of real estate investments is a lack of liquidity. After buying a property, there is no guarantee that you will be able to sell at a reasonable price when you need to cash out your investment. Depending on the market conditions in the location of your property, you might have to keep your property on the market for months before you can cash out.
Then you have difficulty with diversification which is a direct result of the large minimum investment size. When you buy a stock, all that is expected is to participate in the annual general meeting of shareholders. Most retail investors don’t even do that. Thus investing in stocks is a passive investment.
On the contrary, after buying an investment property, you will be responsible for the upkeep of your property. Also, when renting out your property, you are exposed to the risk that your tenant might not honour their obligations. This is a serious risk because the eviction process can be both costly and time-consuming.
Lastly, note that buyer closing costs and seller closing costs are sizable and can eat your profit away.
Manager Tenure
Manager tenure is not a performance measure per se. Its role is to validate the historical total returns of the fund as performance measures. The annualized return loses its relevance if it is considered for a period longer than the current manager's tenure. Manager tenure is of much greater importance for actively managed funds compared to index tracking funds.
Real estate investment trusts (REITs) are a solution to all five limitations we listed for real estate investment. A REIT is similar to a mutual fund or an exchange-traded fund in that it pools investors' resources and deploys them effectively and professionally. The REIT would pay on your behalf for the management of your property, but the diversification and liquidity benefits come at a very low price.
The role of the REIT is to own and manage several properties on behalf of its unit holders and distribute the rent it receives among its unit holders. REITs are often structured as trusts. If they were structured as corporations, they would have faced corporate tax. That extra layer of taxation would have made them an inefficient vehicle for holding real estate investments.
Fund Size
Fund size, on the one hand, tells us how much other investors trust this fund with their money, and on the other hand, it shows how much the fixed cost of running the fund can be spread out and thus how much economies of scale can be achieved by the fund.
Often REITs specialize in a specific section of the real estate market or a specific geographic region.
For example, holdings of a REIT might be concentrated in retail stores, commercial real estate, industrial real estate, residential real estate or health care real estate. To achieve diversification, it is best to use an ETF representing the whole real estate sector by holding a selection of REITs.
The performance of a REIT ETF depends on the performance of the underlying REITs. The performance of each REIT depends on the performance of properties owned and managed by that REIT. As can be seen below, Canadian REIT ETFs have limited price gain and receiving dividends is the main reason for holding a Canadian REIT ETF. So Canadian REITs and REIT ETFs often attract investors interested in fixed income, which makes this a very interest-rate sensitive investment. Over the past few years when bonds were yielding very little, REIT ETFs partially substituted bonds ETFs in some investors portfolio’s. Interest rate dependence explains the inferior performance of REITs in 2022, as 2022 has been a year of fast-rising interest rates.
Alpha
Alpha is a measure of beating the market. It is also called excess return or abnormal rate of return. Alpha can be defined for a strategy, trader, fund, portfolio or security. Positive alpha shows performing better than the index, while negative alpha shows performing worse than the index.
iShares S&P/TSX Capped REIT Index ETF-XRE
| iShares S&P/TSX Capped REIT Index ETF | Exchange/Ticker symbol | TSX/XRE |
| Followed index | S&P/TSX Capped REIT Index | |
| 10 Years Annualized Return | 4.28% | |
| Manager Tenure (Yrs) | 20 | |
| Fund Size (Mil) | $956 | |
| Average Market Cap (Mil) | $3,649 | |
| 3 Year Alpha | 0.17 | |
| 3 Year Beta | 1.18 | |
| 3 Year R-Squared | 74.6 | |
| 3 Year Standard Deviation | 23.23 | |
| 3 Year Sharpe Ratio | 0.06 | |
| Management Expense Ratio | 0.61% |
Data from morningstar.ca as of Oct 28, 2022
XRE gives you broad exposure to Canada’s real estate sector and pays monthly distributions to investors. XRE replicates the performance of the S&P/TSX Capped REIT Index. This is a subindex of the S&P/TSX Composite index and, similar to the S&P/TSX Composite index, is float weighted. As a result, REITs are represented in XRE mostly proportional to their size.
iShares S&P/TSX Capped REIT Index ETF
Exposure of XRE to Different Subsectors
| Subsector | Weight (%) |
|---|---|
| Retail REITs | 38.4 |
| Residential REITs | 23.65 |
| Industrial REITs | 19.75 |
| Diversified REITs | 7.07 |
| Office REITs | 6.46 |
| Health Care REITs | 4.21 |
| Cash and/or Derivatives | 0.44 |
Top 10 Holdings of XRE
| Ticker | Name | Weight (%) |
|---|---|---|
| CAR.UN | Canadian Apartment Properties REIT | 13.78 |
| REI.UN | RioCan REIT | 11.08 |
| GRT.UN | Granite REIT | 8.65 |
| CHP.UN | Choice Properties REIT | 6.72 |
| SRU.UN | SmartCentres REIT | 6.53 |
| AP.UN | Allied Properties REIT | 6.46 |
| FCR.UN | First Capital Realty REIT | 6.40 |
| SMU.UN | Summit Industrial Income REIT | 5.82 |
| HR.UN | H&R REIT | 5.64 |
| DIR.UN | Dream Industrial REIT | 5.29 |
Note that the ticker symbol for each REIT ends in UN to emphasize that these are units of a trust rather than shares of a corporation.
CI Canadian REIT ETF-RIT
| CI Canadian REIT ETF | Exchange/Ticker symbol | TSX/RIT |
| Followed index | Actively Managed | |
| 10 Years Annualized Return | 7.45% | |
| Manager Tenure (Yrs) | 17.9 | |
| Fund Size (Mil) | $575 | |
| Average Market Cap (Mil) | $2,727 | |
| 3 Year Alpha | 1.52 | |
| 3 Year Beta | 1.08 | |
| 3 Year R-Squared | 81 | |
| 3 Year Standard Deviation | 20.5 | |
| 3 Year Sharpe Ratio | 0.16 | |
| Management Expense Ratio | 0.87% |
Data from morningstar.ca as of Oct 28, 2022
RIT is an actively managed ETF investing in the real estate sector. It is concentrated on Canadian equities but might invest as much as 30% of its portfolio in foreign equities. RIT provides monthly distributions to investors. Currently, its portfolio is 88% invested in Canada and 12% in the US.
CI Canadian REIT ETF
Asset Allocation of RIT
Top 10 Holdings of RIT
| Name | Sector allocation | Weight |
|---|---|---|
| Summit Industrial Income REIT - Units | Real Estate Investment Trust | 5.11% |
| First Capital REIT - Units | Real Estate Development | 4.75% |
| BSR REIT - Units | Real Estate Investment Trust | 4.35% |
| Canadian Apartment Properties REIT - Units | Real Estate Investment Trust | 4.31% |
| Tricon Residential Inc | Real Estate Development | 4.18% |
| Dream Industrial REIT - Units | Real Estate Investment Trust | 4.09% |
| Morguard North American Rsdntl REIT - Units | Real Estate Investment Trust | 4.04% |
| Granite REIT - Units | Real Estate Investment Trust | 4.00% |
| Killam Apartment REIT - Units Cl A | Real Estate Investment Trust | 3.92% |
| InterRent REIT - Units | Real Estate Investment Trust | 3.77% |
ZRE invests equally in all liquid Canadian REITs. It gives broad exposure to the Canadian real estate sector, similar to XRE. The difference is that XRE invests in different REITs proportional to their size while ZRE invests equally in all liquid Canadian REITS.
BMO Equal Weight REITs Index ETF-ZRE
| BMO Equal Weight REITs Index ETF | Exchange/Ticker symbol | TSX/ZRE |
| Followed index | Solactive Equal Weight Canada REIT Index | |
| 10 Years Annualized Return | 5.54% | |
| Manager Tenure (Yrs) | 12.4 | |
| Fund Size (Mil) | $564 | |
| Average Market Cap (Mil) | $2,505 | |
| 3 Year Alpha | 2.85 | |
| 3 Year Beta | 1.15 | |
| 3 Year R-Squared | 74.2 | |
| 3 Year Standard Deviation | 22.8 | |
| 3 Year Sharpe Ratio | 0.19 | |
| Management Expense Ratio | 0.61% |
Data from morningstar.ca as of Oct 28, 2022
BMO Equal Weight REITs Index ETF
| Portfolio Allocation for ZRE | |
|---|---|
| Subsector | Weight (%) |
| Retail REITs | 28.3 |
| Residential REITs | 23.5 |
| Industrial REITs | 14.8 |
| Diversified REITs | 14.5 |
| Office REITs | 9.7 |
| Health Care REITs | 4.8 |
| Health Care Facilities | 4.2 |
| Top 10 Holdings of ZRE | |
|---|---|
| Holdings Name | % of Net Asset Value |
| Boardwalk REIT | 5.2 |
| Granite REIT | 5.2 |
| Cominar REIT | 5.2 |
| Summit Industrial Income REIT | 5.0 |
| Killam Apartment REIT | 4.9 |
| Dream Office REIT | 4.9 |
| SmartCentres REIT | 4.9 |
| Allied Properties REIT | 4.8 |
| First Capital REIT | 4.8 |
| Artis REIT | 4.8 |
Russell Investments Real Assets ETF-RIRA
| Russell Investments Real Assets ETF | Exchange/Ticker symbol | TSX/ZRE |
| Followed index | Actively Managed | |
| Manager Tenure (Yrs) | 9.4 | |
| Fund Size (Mil) | $302 | |
| Average Market Cap (Mil) | $21,400 | |
| Management Expense Ratio | 2.36% |
Data from morningstar.ca as of Oct 28, 2022
Russell Investments Real Assets ETF
Vanguard FTSE Canadian Capped REIT Index ETF-VRE
| Vanguard FTSE Canadian Capped REIT Index ETF | Exchange/Ticker symbol | TSX/VRE |
| Followed index | FTSE Canada All Cap Real Estate Capped 25% Index | |
| Manager Tenure (Yrs) | 9.9 | |
| Fund Size (Mil) | $272 | |
| Average Market Cap (Mil) | $4,100 | |
| 3 Year Alpha | 0.05 | |
| 3 Year Beta | 1.22 | |
| 3 Year R-Squared | 73 | |
| 3 Year Standard Deviation | 24.8 | |
| 3 Year Sharpe Ratio | 0.05 | |
| Management Expense Ratio | 0.38% |
Data from morningstar.ca as of Oct 28, 2022