Building an indexed diversified portfolio has never been easier and cheaper for investors. If you like to put your portfolio on autopilot, you can buy a single all-in-one ETF that will even re-balance your stock bonds automatically, all while charging very low fees.
All you need to do is regularly deposit your savings and buy the single ETF on a regular basis – and it can get even cheaper if you use a discount brokerage that eliminates trading fees on ETF purchases.
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However, these indexed products rarely include a material amount of real estate holdings. The easiest way to get real estate exposure in your portfolio is through a real estate investment trust (REIT).
There are merits to holding REITs in your portfolio, first for the distributions, second, for the reduced correlation to regular equities. In addition, it’s 100% hands-off, where you let a professional management team take care of the properties and growth of the company. Finally, you can sell a REIT very quickly if you needed the cash (liquidity) whereas selling a piece of property directly would take time and money.
Backgrounder on REITs
Real Estate Investment Trusts or REITs are companies that invest in real estate assets and distribute their income (primarily from rent) to their shareholders. The distributions are usually in portions of dividends, return of capital, and income.
Equity REITs can be purchased like any other public company/stock through the stock market. If you are interested in REITs, and you haven’t opened a discount brokerage account yet, check out my review of Canadian discount brokerages.
As you know, there are many types of real estate investments, and there are REITs that cover them all. They can range from residential rentals, hotels, superstore leasing, apartment buildings, and seniors housing.
REIT ETFs and Holdings
Perhaps the easiest way to own a portfolio of REITs is through a REIT ETF. There are three popular REIT ETFs in Canada as shown below, but the issue is that the REIT market is fairly small. So each ETF, while charging a fairly hefty MER, will only have a limited number of holdings.
iShares S&P/TSX Capped REIT Index ETF (XRE)
- Holdings: 21
- MER: 0.61%
- Top 10 Holdings:
- REI.UN RIOCAN REAL ESTATE INVESTMENT TRUS 13.56%
- CAR.UN CANADIAN APARTMENT PROPERTIES REAL 13.41%
- HR.UN HANDR REAL ESTATE INVESTMENT TRUST 11.05%
- AP.UN ALLIED PROPERTIES REAL ESTATE INVE 9.66%
- SRU.UN SMARTCENTRES RL ESTATE INVESTMENT 7.11%
- CHP.UN CHOICE PROPERTIES REAL ESTATE INVE 6.09%
- GRT.UN GRANITE REAL ESTATE INVESTMENT STA 5.23%
- DRG.UN DREAM GLOBAL REAL ESTATE INVESTMEN 4.69%
- CUF.UN COMINAR REAL ESTATE INVESTMENT TRU 3.92%
- KMP.UN KILLAM APARTMENT REIT UNITS CLASS 3.11 %
Vanguard FTSE Canadian Capped REIT Index ETF (VRE)
- Holdings: 18
- MER: 0.39%
- Top 10 Holdings:
- REI.UN RIOCAN REAL ESTATE INVESTMENT TRUS 12.95%
- CAR.UN CANADIAN APARTMENT PROPERTIES REAL 11.45%
- HR.UN HANDR REAL ESTATE INVESTMENT TRUST 10.63%
- AP.UN ALLIED PROPERTIES REAL ESTATE INVE 8.43%
- SRU.UN SMARTCENTRES RL ESTATE INVESTMENT 6.8%
- FSV FIRSTSERVICE CORP 6.29%
- FCR FIRST CAPITAL REALTY 5.51%
- CIGI COLLIERS INTERNATIONAL GROUP 5.46%
- CSH.UN CHARTWELLS RETIREMENT RESIDENCES 5.24%
- CHP.UN CHOICE PROPERTIES REAL ESTATE INVE 5.135%
BMO Equal Weights REITs Index ETF (ZRE)
- Holdings: 23
- MER: 0.61%
- Top 10 Holdings:
- SMU.UN SUMMIT INDUSTRIAL INCOME REIT 5.19%
- KMP.UN KILLAM APARTMENT REIT 4.82%
- CRR.UN CROMBIE REIT 4.81%
- DIR.UN DREAM INDUSTRIAL REIT 4.81%
- NWH.UN NORTHWEST HEALTHCARE PROPERTIES REIT 4.69%
- AX.UN ARTIS REIT 4.63%
- CUF.UN COMINAR REIT 4.63%
- CRT.UN CT REIT 4.61%
- CSH.UN CHARTWELLS RETIREMENT RESIDENCES 4.58%
- IIP.UN INTERRENT REIT 4.54%
Owning Individual REITs
If you look over the holdings above, you may notice that the top 10 holdings are a very large percentage of the entire ETF – which adds to the case of owning individual REITs over the ETF.
- iShares S&P/TSX Capped REIT Index ETF (XRE): 77.83%
- Vanguard FTSE Canadian Capped REIT Index ETF (VRE): 77.9%
- BMO Equal Weights REITs Index ETF (ZRE): 47.31%
Even the top 5 holdings are significant:
- iShares S&P/TSX Capped REIT Index ETF (XRE): 54.79%
- Vanguard FTSE Canadian Capped REIT Index ETF (VRE): 50.26%
- BMO Equal Weights REITs Index ETF (ZRE): 24.32%
In addition, as previously mentioned, the MERs are high for a small number of holdings. If you held $10,000/$30,000/$50,000 in each of the REIT ETFs, this is how much it would cost you per year:
- iShares S&P/TSX Capped REIT Index ETF (XRE): $61/$183/$305
- Vanguard FTSE Canadian Capped REIT Index ETF (VRE): $39/$117/$195
- BMO Equal Weights REITs Index ETF (ZRE):$61/$183/$305
Putting it Together
Due to the higher MERs and heavy weightings in the top 10 positions, my preference is to hold individual REITs over owning REIT ETFs. By owning 5-10 positions within the index of your choice (I personally prefer following the capped REIT index like XRE and VRE over the Solactive Equal Weight index that the BMO product follows), your own REIT portfolio will track the index relatively closely all while saving money over the long term.
You may be thinking what about the trading commissions. Best bet would be to sign up with a low-cost brokerage and add to these positions in larger tranches. So purchasing 8 positions at once, would result in approximately $40 in trading fees with Questrade (my review here). The beauty is that it’s not a recurring fee like the MERs quoted above. The larger your portfolio, the more you will benefit from owning individual REITs over the equivalent ETF.
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