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REITs have done surprisingly well since the beginning of the year, despite the drag of rising interest rates. Year to date to April 18, the S&P/TSX Capped REIT Index has risen 11.2%. I have recommended several individual REITs over the years, but some investors prefer the ease and simplicity of buying a single ETF. So, here are my analyses of the some of the top REIT ETFs trading in Toronto.
iShares S&P/TSX Capped REIT Index ETF (TSX: XRE)
Structure: The portfolio holds 16 positions, which are weighted according to their market capitalization. As a result, four REITs account for more than half the fund’s total value (RioCan, Canadian Apartment Properties, H&R, and Allied Properties).
Performance: This is the oldest of the REIT ETFs, having been launched in October 2002. The 10-year average annual compounded rate of return to March 31 was an impressive 15.9%. The one-year gain to that date was the best among the four ETFs reviewed here at 20.8%.
Key metrics: This is the largest REIT ETF with about $1.2 billion in assets under management. The management expense ratio is 0.61%. The closing price on April 18 was $18.65.
Distributions: The fund makes monthly distributions, which are currently $0.069 per unit (about $0.83 per year). At the current price, that equates to a yield of 4.4% but remember the distributions are not guaranteed.
Risk: Moderate. The last losing year was 2015, when the ETF lost 5.2%.
Vanguard FTSE Canadian Capped REIT Index ETF (TSX: VRE)
Structure: The fund is designed to track the performance of the FTSE Canada All Cap Real Estate Capped 25% Index, net of fees and expenses. As with the iShares ETF, the portfolio is weighted on the basis of market capitalization. However, the Vanguard portfolio is slightly larger (18 holdings), so the top four account for only 44% of total assets.
Performance: This is the second-best performer over the past five years, with an average annual compounded rate of return of 9.4%. But its 12-month results were below those of the index, with a gain of 16.5%.
Key metrics: This fund has not really caught on with investors. Total assets are only $180 million, making it the smallest in the group. This is despite having the lowest management expense ratio, at 0.39%. Closing price on April 18 was $33.87.
Distributions: Monthly payments are currently $0.102491 per unit ($1.23 annually). If that rate is maintained this year, the yield will be 3.26% based on current prices.
Risk: Low to moderate. The fund was launched in 2012. Its worst year was 2013 when it fell 1.39%. In 2015, when the iShares fund was dropping 5.2%, this one gained 0.46%. That’s an unusual discrepancy for two funds that are both tracking Canadian REITs, albeit with slightly different approaches.
BMO Equal Weight REITs Index ETF (TSX: ZRE)
Structure: Unlike the first two ETFs, this one is structured on an equal weighting basis. This means that all 20 REITs in the portfolio each theoretically represent about 5% of the total. Overall, there is more diversification here.
Performance: This ETF has the best three-year record, with an average annual compounded rate of return of 13.7%. Over the latest 12 months, it gained 18.7%, better than Vanguard but well behind the iShares entry.
Key metrics: The fund has about $520 million in assets under management. The MER is 0.61%, the same as XRE. The closing price on April 18 was $23.09.
Distributions: The fund distributed $0.085 per month throughout 2018 ($1.02 for the year). If that were to continue in 2019, the yield at the current price would be 4.1%.
Risk: Moderate. The fund has lost money twice since it was launched in 2010: a decline of 4.6% in 2013 and another of 5.16% in 2015.
First Asset Canadian REIT ETF (TSX: RIT)
Structure: This is quite different from the other REIT ETFs. It is an actively-managed portfolio consisting primarily of securities of Canadian real estate investment trusts, real estate operating corporations (REOCs), and corporations involved in real estate-related services. The fund may also invest up to 30% of its net asset value in securities of non-Canadian REITs, REOCs, and corporations involved in real estate related services.
Performance: The 10-year average annual compounded rate of return to March 31 is an excellent 16.34%. The one-year gain was 18.97%, slightly behind the iShares fund.
Key metrics: Assets under management total $371 million. The portfolio is the best-diversified of this group with 37 securities, more or less equally weighted. The top holding is Canadian Apartment Properties REIT with 5.0% of total assets. The management fee is the highest in this group at 0.75%, but remember this is an actively-managed fund.
Distributions: Payments are made monthly. The current rate is $0.0675 per month ($0.81 per year). At that rate, the yield at the time of writing was 4.6%.
Risk: Moderate.
Conclusion
Although it has the lowest MER, the Vanguard fund does not impress us, and its recent one-year performance raises a question mark as to why it trailed the S&P/TSX Capped REIT Index.
The BMO fund offers decent returns and an attractive yield and would be an acceptable choice. The First Asset ETF is also a good choice if you want a more diversified, actively-managed fund with a good yield.
Overall, however, I would choose the iShares entry. It has the longest history, has consistently provided decent returns, and its yield of 4.4% provides the cash flow REIT investors are looking for.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website. This column originally appeared in The Toronto Star.
For more information on subscriptions to Gordon Pape’s newsletters, check the Building Wealth website.
Follow Gordon Pape on Twitter at https://twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
© 2019 by The Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
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