Want to invest in real estate without the huge hassle of purchasing an investment property? Buying a real estate investment trust (REIT) ETF could be the answer.
The potential for REITs to transform real estate in Canada is high. For example, mortgage REITs in the U.S. helped to finance approximately 1.4 million homes and contributed 2.9 million full-time jobs to the economy in 2020.
We will cover the best REIT ETFs in Canada below and discuss some of their features.
Differences Between REITs and REIT ETFs
There is often some confusion about what is a REIT vs REIT ETF. Here are some of the key differences:
|A company that owns, operates, or finances income-producing real estate.
|A collection of REITs in one fund that trades on an exchange like a stock.
|Varies. Some REITs trade on major stock exchanges while others do not.
|High liquidity as they trade on major stock exchanges.
|Limited to the assets owned or managed by the REIT.
|Diversified as they hold multiple REITs, spreading risk across various properties and sectors.
|Active management of real estate assets.
|Usually passive, typically tracks an index of REITs. But can be active as well.
|Direct operational costs; may have management fees if externally managed.
|Management fees, typically lower than mutual funds but higher than individual stocks.
|Can vary significantly based on individual REIT performance.
|Typically reflects the weighted average yield of the REITs in the ETF.
|Can buy shares in a single REIT.
|Buy shares in an ETF, getting exposure to multiple REITs at once.
|Typically, dividends from REITs are taxed as ordinary income.
|Dividend tax treatment depends on the composition of dividends received from underlying REITs. May be a mix of ordinary income and capital gains.
Related Reading: Best REITs in Canada
Key Factors When Choosing Your REIT ETF
Before investing in your REIT ETF, make sure you understand its key factors:
- Objective and Strategy: Knowing the specific focus and approach of the REIT ETF is foundational. Whether the ETF emphasizes commercial, residential, or niche sectors will greatly impact its performance and suitability for your portfolio.
- Holdings and Concentration: The diversity or concentration of the ETF’s holdings can significantly affect its risk profile. It’s essential to understand how spread out the investments are and if there’s excessive reliance on a few major REITs.
- Expense Ratio: Since this fee directly erodes returns, it’s crucial to be aware of the annual charges associated with the ETF. Over time, even small differences in expense ratios can result in significant differences in overall returns.
- Performance History: Though past performance isn’t a guaranteed indicator of future outcomes, understanding how the ETF has fared historically can give insights into its management and strategy.
- Distribution Yield: Given that many investors turn to REITs for income, yield is a critical factor. It represents the annual dividend payment as a percentage of the ETF’s price.
- Liquidity: High liquidity ensures that you can buy or sell shares of the ETF without significant price discrepancies or delays. It generally also translates to lower bid-ask spreads.
- Management Team and Issuer: Consider the reputation and experience of the ETF issuer and the management team. Well-known issuers with a strong track record in the ETF space can sometimes be a safer bet.
- Growth Potential: Consider the growth potential of the sectors and regions the ETF focuses on. Some markets or property types may offer better growth prospects than others based on macroeconomic and industry trends.
Now that you know what to look for in a REIT ETF, check out the list of our top choices below:
Best REIT ETFs in Canada
- iShares S&P/TSX Capped REIT Index ETF (XRE.TO)
- BMO Equal Weight REITs Index ETF (ZRE.TO)
- Vanguard FTSE Canadian Capped REIT Index ETF (VRE.TO)
- CI Canadian REIT ETF (RIT.TO)
- CI Global REIT Private Pool (CGRE.TO)
- Horizons Equal Weight Canada REIT Index ETF (HCRE.TO)
iShares S&P/TSX Capped REIT Index ETF is the largest REIT ETF in the country and the only one with over a billion dollars worth of assets under management.
The fund has been around for over two decades and has been a consistent performer. It comprises 16 REITs, though well over a third of the weight (37%) is in just three REITs – Canadian Apartment, Riocan, and Granite.
The ETF offers its investors the best of both worlds – growth and distributions. The average annual returns have remained over 5% for the last decade, and $10,000 in capital would have grown to over $16,800 by now.
The distributions have been relatively consistent over the years and offer a yield of about 5.40%.
It carries a medium risk rating and comes with a Management Expense Ratio (MER) of 0.61%, which isn’t too high considering the consistent performance of the ETF. However, one thing to consider regarding this ETF is its retail and multi-family lean, where about 70% of the REIT’s weight lies.
If the economy or other market factors distress these two real estate segments, the ETF may experience its impact.
The fund has proven to be adequately resilient, especially if you hold it long-term. It took less than one and a half years to bounce back after the 2020 crash, though its value has fallen substantially after hitting the recovery peak.
Still, the combination of proven performance, a modest MER, and distribution consistency make it one of the best REIT ETFs in Canada.
2. BMO Equal Weight REITs Index ETF
BMO Equal Weight REITs Index ETF is Canada’s second largest REIT ETF, with over $585 million in assets under management (AUM). It tracks the performance of the Solactive Equal Weight Canada REIT Index and has two key characteristics.
There are 22 REITs under this ETF’s umbrella, and almost all carry a similar weight. Almost all REITs make up between 4.5% and 5.5% of the fund.
Another unique characteristic of this REIT is the top three constituents, i.e., Minto Apartments, Chartwell, and First Capital. These three are not usually as prominently represented in other REIT ETFs.
From a sector perspective, this ETF, too, leans quite heavily towards retail, with retail REITs making up about 38.5% of the total weight.
The annualized performance of the REIT is slightly better than the larger iShares REIT ETF – 5.5% in the last ten years, and it would have turned $10,000 in capital to over $18,600 over that period. The annualized distribution yield is slightly lower at 5.23%, and the MER is 0.61%.
Even though the overall weight of the ETF is more equally distributed among REITs, the performance is quite similar to other Canadian REIT ETFs and that of the underlying sector.
Based on its performance, we can safely say that the equal weight stipulation hasn’t done much to differentiate it from other Canadian REIT ETFs, but it’s still a solid pick.
You can buy it for both its consistent performance and steady dividends, which have experienced very little deviation in the last ten years.
3. Vanguard FTSE Canadian Capped REIT Index ETF
Vanguard FTSE Canadian Capped REIT Index ETF is not purely a REIT ETF. It’s made up of 16 companies, three of which are real estate service companies that hold about 22% of the fund’s weight.
This also includes FirstService, the largest holding (by weight) in the fund.
This benefits the ETF in two ways. The first is diversification. Real estate service companies, especially FirstService and Colliers, generate the bulk of their revenue outside of Canada, which shields them from local headwinds.
The second benefit should be performance edge. Unlike REITs that are coveted more for their dividends than growth, FirstService and Colliers can be compelling growers in the right markets.
Unfortunately, it hasn’t been reflected in the performance so far. The ten-year returns of the fund are less than the equal-weight REIT ETF. The monthly yield is also relatively lower – 3.79% when writing this.
However, it’s still a viable option and may outperform pureplay REIT ETFs in the next bull market regarding growth.
You may also like it for its low MER of 0.4%. But it’s important to look into its distribution history, which is comparatively inconsistent. So, if you plan on buying a REIT ETF for distribution, it may not be the top pick.
4. CI Canadian REIT ETF
CI Canadian REIT ETF offers its investors exposure to over 30 real estate companies. While most of them are Canadian REITs, a small portion of the total weight is in other real estate companies like StorageVault and Tricon Residential.
It also has a few US-based REITs. This relatively equal distribution of weight, especially among the top holdings, makes it well-balanced and well-diversified.
With an MER of 0.87%, this is one of the most expensive passive REIT ETFs you can invest in, but considering its performance compared to most other REITs on this list, the additional MER is more than worth it. It also has substantial assets under management (over $497 million at the time of writing this).
In the last ten years, the ETF offered a 7.9% annualized return to its investors, and you could have easily doubled your capital if you had invested in this ETF a decade ago.
It has maintained the same distribution since 2017, but even if we look further back, the deviation is not too significant. This makes it an ideal pick for investors looking for income consistency.
Apart from a relatively high MER, there is almost no reason not to consider this REIT. In addition to compelling growth potential, it also offers a relatively healthy distribution yield of about 5%.
5. CI Global REIT Private Pool
CI Global REIT Private pool ETF should not be confused with a private investment pool of the same name managed by CI Global. It’s a relatively small and new ETF, which was conceived in 2020 and has about $76 million in assets under management.
This REIT ETF is different from all others on this list, primarily because the bulk of its “weight” is outside Canada, and only about a quarter of the weight is made up of Canadian REITs.
The US is most heavily represented, carrying about 63% of the fund’s total weight. This makes it ideal for Canadian investors seeking exposure to non-Canadian REITs. It’s made up of over 50 holdings and also holds cash in multiple currencies.
The MER is quite high at 0.95%, but considering its performance (so far), it may not be enough of a weak point to deter investors from this REIT ETF. It returned close to 10% last year (2023) and has maintained consistent monthly dividends. The current distribution yield is 4.87%.
With the data we have, this looks like a promising REIT ETF for most investors and apart from its performance, diversification and US exposure may be reason enough to consider this REIT.
If it’s contrarian enough, it may offset any devaluation you may face with Canadian REITs and the slump of REIT ETFs.
6. Horizons Equal Weight Canada REIT Index ETF
Horizons Equal Weight Canada REIT Index ETF is quite similar to BMO Equal Weight REITs Index ETF because they both follow the same Solactive index. One main difference is that the Horizons one is quite new, was created in 2019, and comes with a lower MER of 0.33%.
The other difference is that it doesn’t make any distributions. So, it’s not a viable pick for investors looking for income from their REIT ETF.
With distributions out of the way, all that’s left is performance. Unfortunately, since the ETF joined the TSX at a time when the REITs were going through a relatively rough phase, its performance history isn’t very appealing.
This may change going forward as the market becomes more bullish and the REIT stocks start going up.
If you are optimistic about the performance of Canadian REITs and distributions are secondary to your ROI goals, it may prove to be a good pick in a healthy market. But for now, its only significant appeal is the low MER.
Are REIT ETFs Worth The Fees?
If you are investing with a long-term horizon, REIT ETFs can be worth the fees that they cost as compared to actually buying the property.
A REIT ETF is responsible for a large number of investment properties and takes responsibility for things such as collecting rent and managing properties. Replacing a REIT ETF on your own would require you to become a property manager for a large number of properties, which is likely impossible.
As a short-term investor, REIT ETFs can drop in value rapidly if the overall stock market experiences a correction. This is because other investors are rushing into cash and selling all asset classes. As a rule of thumb, investing in REIT ETFs or most medium-risk investments is inappropriate over a short time horizon.
Over a long period of time, REIT ETF returns are more similar to the returns of actual physical real estate. From 1977 to 2010, data shows that REITs have generally outperformed direct real estate investing in the U.S.
High yields, additional diversification, and liquidity are all great reasons to consider REIT ETFs and also why they are generally worth their fees.
However, many people prefer just buying a few REITs themselves directly to save on the MERs, rather than buy REIT ETFs. That is also a great option for many investors.
Downsides to Investing in REIT ETFs
While investing in REIT ETFs offers many potential benefits, there are also downsides to consider:
- Expense Ratios: Even though ETFs usually have lower expense ratios than mutual funds, they still carry fees. Over time, these fees can erode returns.
- Dividend Taxation: Unlike the qualified dividends from many stocks, REIT dividends are often taxed as ordinary income, which can be at a higher rate for many investors.
- Interest Rate Sensitivity: REITs, in general, are sensitive to interest rate fluctuations. When interest rates rise, the high dividends paid by REITs can become less attractive relative to other investments, leading to a decrease in REIT prices.
- Market Volatility: Like all investments traded on stock exchanges, REIT ETFs can be subject to market volatility. This can lead to short-term price fluctuations.
- Limited Capital Appreciation: While REITs are known for their dividend yields, they may not offer as much capital appreciation potential as other equity investments.
- Concentration Risk: Some REIT ETFs might focus heavily on specific real estate sectors (e.g., residential, commercial, healthcare). If one sector underperforms, the ETF’s performance can be significantly impacted.
- Economic Dependency: The real estate market is closely tied to the broader economy. Economic downturns can lead to decreased demand for space, falling rental incomes, and reduced property values.
- Lack of Control: Investing in a REIT ETF means you’re entrusting the management to someone else, as opposed to direct real estate investment, where you have more control over individual properties.
- Regulatory Changes: Governments can introduce regulatory changes that affect the real estate market, such as rent controls or zoning laws. These can influence the profitability of REITs within the ETF.
How to Buy the Best REIT ETFs in Canada
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We have looked at a complete list of REIT ETFs on the Canadian shelf above. Here’s another list that contains the best ETFs in Canada.
With that said, REIT ETFs in Canada are not the only way to add real estate exposure to your portfolio. Individual stocks involved in real estate should also be considered an alternative to REIT ETFs.