REITs have done surprisingly well over the past year, despite the drag of rising interest rates.
Over the 12 months to Jan. 18, the S&P/TSX Capped REIT Index rose 5.5 per cent. Compare that with a decline of 6 per cent in the TSX Composite. That’s an outperformance of 11.5 percentage points.
I have recommended several individual REITs over the years, but some investors prefer the ease and simplicity of buying a single ETF. So, here is my analysis of the three top REIT ETFs trading in Toronto.
iShares S&P/TSX Capped REIT Index ETF (XRE-T)
Structure: The portfolio holds 16 positions that 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 compound rate of return to Dec. 31 was an impressive 13.25 per cent. The one-year gain to that date was the best among the three ETFs at 5.76 per cent.
Key metrics: This is the largest REIT ETF with about $1.2-billion in assets under management. The management-expense ratio is 0.61 per cent. The closing price on Jan. 22 was $17.60.
Distributions: The fund makes monthly distributions, which are currently $0.069 per unit (about $0.83 a year). At the current price, that equates to a yield of 4.7 per cent but remember the distributions are not guaranteed.
Risk: Moderate. The last losing year was 2015, when the ETF lost 5.2 per cent.
Vanguard FTSE Canadian Capped REIT Index ETF (VRE-T)
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 per cent of total assets.
Performance: This is the best performer over the past five years by a small margin, with an average annual gain of 7.45 per cent. But its 2018 results were well below those of the index, with a gain of only 1.69 per cent.
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 per cent. Closing price on Jan. 22 was $31.85.
Distributions: Monthly payments are currently $0.102491 a unit ($1.23 annually). If that rate is maintained this year, the yield will be 3.85 per cent based on current prices.
Risk: Low to moderate. The fund was launched in 2012. Its worst year was 2013 when it fell 1.39 per cent. In 2015, when the iShares fund was dropping 5.2 per cent, this one gained 0.46 per cent. 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 (ZRE-T)
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 per cent of the total. In fact, there is some leeway, with top holding InterRent REIT comprising 6.28 per cent of the assets and Boardwalk REIT at the bottom with 4.25 per cent. Over all, there is more diversification here.
Performance: This ETF has the best three-year record, with an average annual gain of 11.33 per cent. Over the past 12 months, it gained 3.16 per cent, 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 per cent, the same as XRE. The closing price on Jan. 22 was $21.79.
Distributions: The fund distributed $0.085 a month throughout 2018 ($1.02 for the year). If that were to continue in 2019, the yield at the current price would be 4.7 per cent.
Risk: Moderate. The fund has lost money twice since it was launched in 2010: a decline of 4.6 per cent in 2013 and another of 5.16 per cent in 2015.
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 so badly.
The BMO fund offers decent returns and an attractive yield and would be an acceptable choice.
Over all, however, I would choose the iShares entry. It has the longest history, has consistently provided decent returns, and its yield of 4.7 per cent, the same as the BMO entry, provides the cash flow REIT investors are looking for.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.