Despite being a relatively new investment product, exchange-traded funds (ETFs) have claimed a decent portion of the market alongside index funds. As of July 2020, about 811 ETFs are available to Canadian investors.
I love ETFs for their ease of trading, diversification, and low costs. But if you are more into tangible assets like real estate but can’t enter the market due to high costs, REIT ETFs offer a fantastic middle ground. An ETF is a diversified portfolio of REITs – each with its own real estate portfolio.
This article can help you choose the best REIT ETF Canada.
5 Best REIT ETFs in Canada
I’ve ranked the REITs based on their capital growth potential (Five-year growth), and current dividend yield. Also, the dividend yield will be stated in this format: Current Distribution Yield | 12-Month Trailing Yield.
1. CI First Asset Canadian REIT ETF (RIT)
Dividend Yield: 5.21% | 5.18%
Management Expense Ratio (MER): 0.97%
Assets Under Management: $561.5 million
Main Exposure: Residential & Commercial, Mostly Canadian Equities (30% into foreign securities)
The ETF was born in November 2004 under the company First Asset, which was later acquired by CI Financial. Now the combined CI Financial own and manage the Canadian REIT ETF worth half a billion dollars.
The ETF is rated to be low to medium risk, but be aware that there can still be large swings in value as noted by its performance in the current market crash in 2020 (which is essentially the risk associated with the underlying market). The ETF fell by almost 40% in valuation and is recovering very slowly.
From a diversification point of view, the fund looks quite evenly distributed. The bulk of the fund is dominated by residential (32.2%), industrials (21.2%), and retail (18.5%). The rest of about 28% is divided into five different sectors.
There are a total of 36 securities packed into the fund, top five of which are Canadian Apartment Properties, Interrent, Granite, Dream Industrial, and Killam Apartment REITs. They make up almost 23% of the portfolio, weighing around 4.9% each. It’s a fine collection, as three out of five are dividend aristocrats, and four of them are decent growth stocks.
The growth potential of its underlying securities is evident in the ETF’s capital growth. It grew its share price by almost 51% in the past five years, resulting in a CAGR of almost 8.5%. The current dividend yield of 5.2% is also very desirable. It pays monthly dividends, but you can choose to get them reinvested back into the fund.
The combined growth potential and dividends from the ETF make it almost worth the relatively expensive management fee and MER ratio. It’s currently trading at a lower-than-usual price ($15.5 per share) since it has trouble recovering from the market crash. A housing bubble burst can really damage this fund’s performance since almost one-third of it is based upon residential securities.
2. BMO Equal Weight REITs Index ETF (ZRE)
Dividend Yield: 5.06% | 5.35%
Management Expense Ratio (MER): 0.61%
Assets Under Management: $513.1 million
Main Exposure: 1/4th Residential & rest Commercial, all Canadian equities
It’s another high-income ETF, created and managed by the bank of Montreal’s Global Asset Management. BMO is one of the big five banks. The fund is almost equally weighted out to minimize risk, and it has been around for ten years. It’s currently rated as a medium risk.
The fund is 99.6% securities, and the rest is cash, so there is no diversification from an asset-class perspective. There is also no geographical diversification (other than whatever geographical distribution the underlying REITs have). The sector division is relatively neater. Residential and retail REITs hold the most significant position, 24.7%, and 24.6%, respectively, whereas, the third-largest chunk is industrial REITs (20.7%). The rest is distributed among diversified REITs, Office, and Healthcare REITs.
It’s top five are a bit different from the earlier ETF. Granite is in both of them, but the rest are different. The leading security, Boardwalk REIT, is a Canadian REIT that trades on TSX.
The underlying securities of this fund also tend to favor growth as well as dividends. It offers a five-year CAGR of 7.4% and a respectable 5% yield.
Dividend Yield: 4.59% | 6.14%
Management Expense Ratio (MER): 0.61%
Assets Under Management: $1.05 Billion
Main Exposure: 29% Residential & rest Commercial, all Canadian equities
IShares came into being in Oct 2002, and apart from being one of the oldest REIT ETFs in the country, it’s also one of the most sizeable ones. The ETF was created and is managed by BlackRock, a global investment management firm. It’s the world’s largest provider of ETFs. It has shown amazing growth since its inception and has only two significant “drops” in its history. One was during the last recession, and the current fall in valuation, that the fund still hasn’t recovered from.
Unlike the two ETFs before, IShares’ most massively populated sector is retail, which makes up almost 30% of the fund, followed closely by 29% residential REITs. The rest of the 30% is dominated by industrial (17%), followed by office and diversified REITs (10% each). The securities are also not very equally distributed. The top five securities make up almost 50% of the fund. Lead holding is Canadian Apartment REIT (15.5%), and the other four are Riocan, Allied Properties, Granite, and Choice Properties REITs.
Apart from sporting a generous dividend yield, the fund has also shown a decent bit of growth in the past. It’s almost on par with the first two ETFs when it comes to increasing its price. The fee is reasonable enough, and if you invest a substantial amount in this fund, you can start a passive income just through dividends. Or, you can reinvest those dividends, and leverage the capital growth.
4. Vanguard FTSE Canada Capped REIT Index ETF (VRE)
Dividend Yield: 4.08% | 6.57%
Management Expense Ratio (MER): 0.39%
Assets Under Management: US$ 228 million
Main Exposure: 23% Residential & rest Commercial, all Canadian equities
Vanguard is the largest mutual fund provider around the globe, and the second-largest ETF provider. Though its AUM (Assets Under Management) are paltry compared to other funds on this list, its yield is almost on par. It tracks the progress of the TSE Canada All Cap Real Estate Capped 25% Index.
The fund mostly comprises of a total of 16 medium to small market cap REITs. Industrial REITs dominate with 27.5%, followed by residential (23%), services (15.6%), and finally, retail (14.8%). The top five companies make up almost half the portfolio in this fund as well, led by Canadian Apartment REIT (16.4%), FirstService (11.13%), and Allied, Riocan, and Granite (almost 10% each). Apart from a few, most stocks are growth-oriented, but owing mostly to the current fall in the values of underlying securities (and the sector’s weakness as a whole), the five-year CAGR comes out to 4.5%.
Vanguard is the benchmark when it comes to mutual funds, but it’s not wise to assume the same would happen with its ETFs. Still, this ETF shows promise and might fare very well in the post-recession economy.
5. Purpose Real Estate Income ETF (PHR)
Dividend Yield: 3.93% | 4.28%
Management Expense Ratio (MER): 0.79%
Assets Under Management: $ 17.5 million
Main Exposure: 1/3rd Residential & rest commercial, 50% the United States and 44.7% Canadian Securities
This comparatively tiny ETF really has two things going for it. One is its geographic diversification, and the other is its relatively decent yield – Not compared to other ETFs on this list, but compared to other Canadian REIT ETFs available. It also has a decent cash portion, almost 5.23%. The ETF was created by Purpose Investments in 2014.
The ETF has 50 underlying holdings, and residential REITs win the weightage game by quite a margin. 31% of residential REIT weight is followed by 22% industrial and 19% specialized. The rest is primarily retail, healthcare, and office. The portfolio weight is pretty evenly distributed, and three of the top five holdings are Canadian: Granite, SmartCentres, and Killam REITs.
It offers a DRIP plan or monthly dividends, whichever you want to choose, and like all other ETFs on this list, it’s eligible for your registered accounts. Its growth history, while not on par with the others, is considerable, especially in the past three years before the crash. As the underlying securities of the fund recover, the chances are that its growth, as well as dividends, will increase. But if it’s offering a yield of 3.93% at its current valuation, the chances are that it would go down when the price of the fund picks up some pace.
How to Buy REIT ETFs in Canada
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Choosing the best REIT ETF Canada might not be as hard as choosing the best individual REIT and will offer you more portfolio diversification. The real estate sector is currently struggling to recover, which means it might be a perfect time to by a REIT ETF. You can get a bargain price and lock in a decent yield all at once.